The Indian real estate sector is set for growth as it has a potential access to approximately USD 41 billion of untapped domestic institutional capital, according to JLL’s latest report
‘The rise of domestic capital in Indian real estate’. Since 2010, the Indian real estate sector has attracted institutional investments of approximately USD 57 billion with about USD 46 billion of these investments occurring between 2015 and H1 2023, accounting for 81% of the investments since 2010.
The Americas has so far been the biggest private equity (PE) investors in India. With the current looming
fear of recession, there has been a significant shrinkage in their share, dropping from a high of 52% in 2022 to 26% in H1 2023. However, as foreign institutional investors turned cautious, H1 2023 witnessed a growth in domestic capital, which has helped fill the void.
Introduction of guidelines for Real Estate Investment Trusts (2014), the Housing for All Mission (2015), the Real Estate Regulation and Development Act (2016), the Benami Transactions (Prohibition) Amended Act (2016), the Goods and Services Tax (GST) and relaxation in FDI norms, gave a boost to institutional investments from 2015 onwards.
The regulatory changes brought about by the government in the last few years have resulted in increasing participation from domestic financial institutions in the real estate sector. From 2010 till H1 2023 the real estate sector has witnessed exits amounting to approx USD 12 billion across 267 deals. The depth of domestic capital is demonstrated through the facilitation of 73% of exits by domestic investors compared to the 27% facilitated by foreign investors. The report also indicates that in the last 12 years buybacks and secondary sales were the preferred exit routes, accounting for 51% and 31% respectively.
The last two Real Estate Investment Trusts (REITs) witnessed an increase in participation from domestic institutional investors such as mutual funds and insurance companies, in comparison to the first two REITs. The participation of these domestic institutions as anchor investors in the recent REITs is an example of the growing interest of these institutions in real estate.
“Domestic institutions like insurance companies, mutual funds, and pension funds, are increasingly recognizing the potential of real estate as an asset class to diversify their investment portfolios and achieve long term returns. The last two REITs i.e., Brookfield and Nexus Select Trust REIT saw an increase in participation from domestic institutional investors. For Nexus Select Trust REIT, the entire anchor allocation of INR 1,440 crore was spread across 20 major anchor investors, and 81% of them being domestic insurance companies, mutual funds, and pension scheme. This accounted for 45% of the total issue size of INR 3200 crore. This indicates how domestic institutions have become an integral and important part of real estate investments. Domestic institutions are growing stronger due to sustained capital inflows enabled by the growing economy and a robust regulatory environment. We anticipate that investments from domestic institutions will become an important source of capital in the real estate sector in the years to come.” said Lata Pillai, Senior Managing Director and Head – Capital Markets, India, JLL.
Real estate-focused Alternative Investment Funds (AIFs) are a lucrative option for real estate investment for domestic institutions, Ultra High Net Worth Individuals (UHNWIs), and family offices. As on December 31, 2022, the total fund raised in AIF-II category stood at USD 116.5 billion, representing a growth of 91% Compound Annual Growth Rate (CAGR) from USD 427 million in 2013. Approximately USD 16 billion has been raised till date in real estate through AIFs, infusing much-needed liquidity into the sector. Currently, there are 23 domestic real estate funds that have been announced and are in the process of raising capital for real estate to the tune of approximately USD 3.6 billion.
The enactment of IRDA Act 1999 and the opening of the insurance sector in 2000 to private and foreign insurers provided a much-needed boost to the sector. The ownership limit for foreign firms was increased to 74% in 2021 from the initial cap of 26 %. The insurance market in India is expected to reach USD 222 billion by 2026. As of March 31, 2023, the 22 life insurance companies and the top 20 general insurance companies have an Asset Under Management (AUM) of INR 53.53 trillion and INR 3.53 trillion respectively. However, the real estate investments made by life insurance companies have been approximately INR 10,867 crore, and by general insurance companies, it has been approximately INR 1,845 crore, which is only a fraction of the permissible amount. Enabled by the regulatory framework, the insurance sector is another source of long-term capital with a potential of about INR 1.65 trillion (USD 20 billion) waiting to be tapped by the real estate industry from insurance companies alone.
Mutual Funds can also invest in real estate, including investments in REITs and shares of real estate companies. However, the total exposure to the real estate sector cannot exceed 10% of the net asset value (NAV) of the scheme. The average AUM of the Indian mutual fund industry has grown more than 5 times in a span of 10 years. According to data from AMFI, the AUM of equity schemes till Q1 FY 2024 was INR 17.47 lakh crore. Assuming the 10% limit set by SEBI, the potential for deployment in REITs / InvITs stands at INR 1.7 lakh crore. With this growing liquidity in the domestic public market, there is substantial appetite amongst domestic investors who are scouting for quality investment opportunities.
Family offices / UHNI’s
India is home to the third-highest number of centi-millionaires in the world, with 1,132 individuals, trailing only behind the USA (9,730) and China (2,021). The average wealth per adult in India has risen at an annual rate of 8.7% since the year 2000, reaching USD 16,500 by the end of 2022. Furthermore, the population of ultra-high-net-worth individuals (UHNWIs) – those with a net worth over USD 30 million is estimated to increase by approximately 40% in the next few years, from 13,627 in 2021 to over 19,000 individuals in 2026. Private wealth is a growing segment in India and is expected to contribute significantly to the pie of private domestic capital investments in real estate sector.
The investment ecosystem is changing with more financial avenues opening up for real estate investments. The current government policies and legislation, including tax incentives have boosted the demand for real estate and contributed to the positive market outlook. Domestic institutions are growing stronger due to sustained flow of capital enabled by the growing economy and robust regulatory environment. This is expected to become an important source of capital in the years to come.
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