Low 10-year mortgage rates and attractive incentives have led to a significant increase in home sales
Images: Ramesh Pathania/Mint via Getty Images
Jhe early 2020s will be remembered for so many events stemming from the global pandemic, but one thing is certain: it made us aware of spaces, both where we are and where we want to be.
This awareness has enabled the commercial real estate sector (CRE) to emerge from a period of uncertainty and position itself as an active agent in the recovery of the economy. India saw $2.4 billion in investment in real estate assets, a 52% year-on-year (YoY) growth in the first two quarters of 2021. The rate increase and the continued outstanding performance of the service sector led to new uptake and high turnover. office space prices. Low 10-year mortgage rates and attractive incentives also led to a significant increase in home sales. All in all, CRE had an uneven but productive year.
The pandemic has forced us to reconsider the spaces we inhabit and their usefulness in the new normal. Residents are now more aware of building protocols, building materials, clean energy use, air filtration and circulation, and health and safety standards. The user now appreciates and differentiates on the basis of quality and services, and this is an encouraging step for the industry.
Why is real estate gaining importance in an investor’s portfolio and what does the next decade hold?
CRE is one of the largest types of assets in the world. In the United States, its size is estimated at more than 16 trillion dollars. This includes offices, shopping centres, warehouses, rental apartments and hotels, but excludes the residential construction sector or single-family dwellings. While India is a service-oriented economy like the United States, its approximately $500 billion CRE market is largely dominated by offices and, to a lesser extent, shopping malls and hotels. . Organized rental apartments and warehouses are still in their infancy, and it’s still early days for alternatives like data centers and other specialty assets like retirement homes.
Building this backbone of the economy will be exciting as India nears the $5 trillion GDP mark. Alternative investments such as real estate, infrastructure and private equity now receive more than 30% of allocations from the global pool of institutional capital (compared to around 5% a few decades ago). Managers of such capital find CRE in India attractive due to its unique combination of: 1) Strong demand, driven by increasing urbanization and the growth of service-oriented industries. 2) Deepening capital markets in a maturing regulatory landscape. 3) Strong real growth and reasonable inflation. We estimate that these attractive characteristics could lead to a 10-fold increase in the value of the CRE sector over the next few decades and represent a multi-trillion dollar investment opportunity.
In this context, I want to dispel some misconceptions.
First, office spaces are not going away. Indeed, the resilience of the office sector has been tested and it is emerging stronger. Overall, investment continues to flow into office space, while valuations have remained stable. Office buildings provide a safe and collaborative environment that will continue to be at the heart of innovation and organizational development.
Second, sectors that were hit hard during the pandemic, such as shopping malls and hotels, have made a comeback. The closures underscored the importance of experiences for both leisure and business travelers, resulting in several hotel types – luxury, extended stay, etc. – outperforming. Likewise, we’ve seen the true value of brick-and-mortar retail transcend simply serving as a point-of-sale. For the community, retail is a place to bring family, meet friends and engage.
Finally, the world continues to urbanize at a rapid pace and by 2050 more than two-thirds of the world’s population is expected to live in urban areas, up from 50% currently. With an estimated 400 million increase in urban population in three decades, India’s megacities (population over 10 million) present unique challenges and huge opportunities. Real estate will continue to be the backbone of this growth, not only through the construction of new schools, hospitals, stores, homes and offices, but also by supporting the interplay of “live, work, play” and no more “suburbanization”.
Real estate buyers now appreciate and differentiate themselves on the basis of quality and services
Image: Dhiaj Singh/Bloomberg via Getty Images
Some tips for selecting the right manager to make money for you:
Transparency: The CRE has taken giant steps to overcome the taint of being an opaque sector in the past; several challenges remain to be overcome. Therefore, managers with better governance structures are likely to come out ahead.
Investable: Ease of investment and divestment, as well as lower friction costs, are central to institutionalization and the creation of a wider universe of investors. With the introduction of REITs, retail investors and portfolio managers have a vehicle to invest in small and large amounts, and in all cities without physical proximity being an obstacle.
Predictability: The quality of cash flows makes CRE attractive in most economic periods. High quality assets and leases increase forecast accuracy, resulting in lower discount rates and higher value.
Sustainability: CRE will play a key role in managing an overall sustainable development program. We believe that durability should be at the heart of defining a good asset that is ‘built to last’.
Some emerging themes in CRE:
Apartments/rental units: While 2022 should continue to see growth in traditional home sales, I expect a greater proportion of young families looking for flexibility and affordability will continue to prefer the “value” option of lease. The expansion of rental housing organized across income groups will result in the creation of new format housing spaces, with further institutionalization of multi-family housing, student housing, senior housing and housing estates.
Storage : Warehousing is an essential part of the supply chain to cope with changes in Indian consumption habits and the rapid growth of e-commerce. According to Knight Frank, India has a warehouse stock per capita of only 0.02 sq m, while the United States, China and the UK have 4.4 sq m, 0.8 sq m and 1. 09 m².
Responding to climate change: Estimates suggest that around 20-25% of India’s total energy demand comes from industries that manufacture building materials. As we actively decarbonize our economies to adapt to climate concerns, decarbonizing the property sector and its supply chain will drive a major shift in how we value, finance and invest in it.
Technology in real estate: The rise of smart buildings and the adoption of digital twins (a building mapped on software across all parameters) in real estate will transform digital onboarding from being primarily reactive to anticipating technology and customer needs , which will save time and money while increasing the quality of service. provided.
In 2021, “we got up and stared” and took more notice of the places we live and work in, returned to the hotels we craved, looked forward to office campuses, went back to the schools and colleges we all used to go to every day, and even happily shopped in the stores. All to (re)discover the joys of being part of a community, a community made possible thanks to a network of real estate assets that works well. In the year ahead and into the decade ahead, the CRE sector will continue to house our economy while ensuring that our cities remain places and spaces of innovation and can respond to the disruptions looming in the future. horizon in a way that will only make us stronger together.
The author is Managing Partner, Head of Real Estate-India and Middle East, Brookfield Asset Management
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(This story appears in the January 14, 2022 issue of Forbes India. To visit our archive, click here.)