2019 has been a strong year for Indian real estate, with many milestones like the first REIT launched in March, the continued rise of exciting new sectors like co-working and managed offices, and consolidation of the market into a more structured, transparent investment space after a transition period in the wake of RERA. Not only return from real estate outperforming riskier assets, but they are also becoming more flexible, combining the varied advantages of different securities. This mixture of stability and flexibility has greatly increased the attractiveness of real estate, the world’s largest asset class.
Whether technological, financial, regulatory, or consumer-driven change, there have been many exciting developments in 2019 that promise a positive outlook for real estate. This article highlights 5 trends with the potential to drive disproportionate change in 2020 and beyond.
SEBI-regulated investments: Prior to RERA, pre-launch sales were an important source of early-stage capital for real estate developments. While convenient, these were unregulated opportunities with no standardization of structure or transparency. Today, there has been a marked shift toward regulated investments for the early, pre-approval phase of a project. These investments typically use an AIF structure and, in some cases, the PMS route. Exits, especially for rent-yielding properties, have started moving to the REIT structure. We expect these trends to continue to transform real estate over the next several years as the industry completes its transformation from its “wild west” reputation to a stable, transparent and regulated one. Professionally run developers will find it easier to raise these types of institutional capital and grow their market share.
Managed offices and homes: Worldwide, co-working and managed offices are the fastest growing parts of commercial real estate. These offices allow tenants to focus on their core business and leave facility management and services to a specialist operator. In India, the sector is set to achieve 10 million square feet in record time, with more than a 10% market share of total office leasing already. Similarly, the more nascent category of co-living, which provides managed homes, grew 100% in 2018 and has attracted a large number of players. While the demand for managed properties is clearly growing, it is telling that only 40% of the more than 850 co-working spaces are actually profitable, and co-living faces even tougher unit cost economics. We expect these sectors to continue to grow but weaker players will be winnowed in the Darwinian struggle for survival
Specialization: Every industry tends to reward either vertical integration or increased specialization when competition intensifies, and real estate is no different. Where once developers engaged in pretty much all types of real estate developments, higher specialization will be required in the future as competitive pressure makes it difficult to succeed as a jack of all trades. We can expect to see developers specializing in retail, logistics, senior-housing, student-housing, medical offices, and such other specialized sectors and these specialist players are likely to significantly grow their market share within these sectors at the expense of the generalist developers. A lot of the growth over the next few years will be driven by these emerging sectors, and a lot of the profits from this growth will be concentrated among firms with the right set of skills and experience.
International scale projects: As capital-raising moves from informal HNI networks to institutional funding, the amount of capital that can be raised for a single project will continue to witness strong growth. This will allow deal sizes to increase, which means there are likely to be larger real estate developments, whether commercial, residential or retail. With large interstate migration to cities like Bangalore, Pune, Hyderabad and Delhi, India’s growing urban centers will benefit from these larger developments that will have the scale to provide world-class amenities such as sporting and entertainment facilities within the developments. These projects will be able to invest in aesthetics, landscaping, vibrant common spaces, and international-quality design to create self-contained oases within crowded cities and business hubs.
Technology-driven innovation: Like with so many industries, technology has had a positive impact on real estate. Digital marketplaces have revolutionized real estate investments and enabled investors to profit reliably, safely, and conveniently from the sort of exclusive property assets that used to be the domain of large institutional investors. Technology is also transforming construction, where the pressure to complete projects quickly is increasing demand for better construction methodologies, such as prefabricated construction technology. These technologies are especially important in a country like India where millions of homes and offices will be required in the years to come as the process of urbanization continues.
Conclusion: This is a unique period for Indian real estate. It is being transformed in various ways, whether it be in financing, construction, specialization or scale. Developments, which used to be one-off projects, are being transformed into assets where continuing services are required. There are a host of new sectors like senior living, student housing, managed offices and logistics parks that are growing rapidly. New avenues are being created to profit from all this, such as AIFs and REITs. Technology platforms are greatly simplifying the process of finding the best investment opportunities, and regulations are creating a culture of transparency. The next few years look promising for the real estate industry, especially for those firms who have the expertise to add value and capitalize on these opportunities.