Real estate sector experiences power of policy support in India

V Nagarajan

India’s real estate sector, with an approximately 7.3 per cent share in India’s GDP, has undergone significant transformations, particularly in its financing landscape post the pandemic, as Private Equity (PE) funds regained confidence.

Policies and reforms have further bolstered this environment, facilitating private equity investors’ deployment of capital into the real estate sector, according to Savills recent survey.

Consequently, traditional asset classes like commercial office, retail, and residential have witnessed continued Private Equity investments in recent years. This trend has set in motion a virtuous cycle of development, with fund inflows growing in tandem with the sector’s expansion.

While the past has witnessed positivity amid uncertainties, the future looks secure and more interesting. There is clear evidence of investor confidence as they increasingly favour alternative assets, such as industrial & warehousing, life sciences, data centres and student housing real estate.

According to Savills’ report, real estate sector in India has experienced the power of policy support in the last decade. “Sustained economic growth with continued policy reforms catalysed these investments further, especially the PE investors that invested $10.7 billion (INR 843 billion) in the last three years (2021-2023), spread across just under 100 deals,” said the report.

The initial years of the current decade witnessed about 30 transactions each year, which has progressed over 25 per cent in numbers as well as by 13.7 per cent in investment value, reaching $3.9 billion. The average deal sizes across the years have been in the range of $100-120 million (INR 8.3-9.9 billion) during 2021-2023.

The office segment, a well-established asset class in India, garnered the maximum share at 51 per cent over the last three years, followed by industrial & warehousing at 20 per cent. As investors shifted their focus onto other asset classes, investments diversified into other sectors.

Emerging Trends: The share of land transactions in the overall PE investments rose from 5 per cent in 2021 to 26 per cent in 2023. In absolute terms, the quantum of land deals has grown six times in 2023 from that registered in 2021.

During 2021-2023, India witnessed $3.1 billion (INR238 billion) of PE investments in alternatives, constituting about 29 per cent share in the overall investments. The share of investments flowing in from Asian investors grew from 15 per cent during 2019-2020 to 47 per cent during 2021-2023.

Indian office real estate has consistently witnessed gross leasing of approximately 55 million sq. ft. on an annual basis.

The segment would require an equivalent amount of office stock to be introduced perpetually on an annual basis to be able to meet the demand.

This demand may range between 40 million sq. ft. and 70 million sq. ft. based on conservative and optimistic scenarios.

It has been estimated that the investment potential in office real estate in India to range between $2 billion (INR 175 billion) and $4 billion (INR 305 billion) on an annual basis, based on conservative and optimistic scenarios. Realistically, office real estate in India holds the potential to attract institutional investments amounting to $3 billion (INR 240 billion) on an annual basis. This can be jointly funded by PE investments, developers’ own funds, or joint development agreements.

The industrial & warehousing segment demand has been on an upward trajectory in the last three years recording an average annual absorption of 46 million sq. ft. and holds the potential to attract institutional investments amounting to $1.2 billion (INR 99 billion) on an annual basis.

India has the potential to create a demand for approximately 96 million sq. ft. of life sciences research and development real estate from 2021 till 2030.

I bought a commercial property and plan to sell and repatriate the sale proceeds. What are the rules involves while repatriating the amount? Naveen Jagesha, Sharjah.

With the decentralisation of authority, the authorised dealer may allow repatriation subject to the prescribed conditions like the property was acquired in accordance with the provisions of exchange control regulations. The amount repatriated cannot exceed the amount that was paid initially for acquisition. The balance amount can be credited only to NRO account and can be repatriated upto $1 billion per financial year.

While renting the property in India, what are the tax implications involved and is the rental income repatriable? Deepak Tilsani, Dubai

The tenant in India would be required to withhold taxes while remitting the rent. The standard deduction of 30 per cent and interest paid on home loan taken by the NRI/PIO for acquisition of the property will be allowed for deduction.