Office space emerging as darling of private equity investors in India

Office space is getting the lion's share of investments by PE investors into the sector, experts suggest this trend is likely to continue in the coming months

Despite a rise in interest rates and global headwinds, the office space is witnessing a high inflow of investments from private equity (PE) investors in India. Data released recently by various real estate consultancies points out that in the first half of 2023, 66 to 68 per cent of all PE investments in the sector went towards office spaces.

According to Knight Frank India, the office space received investments worth $1.8 billion from PE investors in the first half of 2023. This is a 24 per cent jump as compared to the same period last year.

Data released by JLL also points in the same direction. "The office market showcased resilience in the last two years and are seeking ways to seamlessly weave hybrid modes of working through flex spaces," it said. It pegged the share of office space in all investments at 66 per cent.

"Both multinational corporations (MNCs) and domestic companies are showing a growing preference for modern office setups as opposed to traditional ones. This increased demand is not limited to the IT sector but spans across various industries and cities," said Amal Mishra, co-founder of a Bengaluru based managed co-working space provider, Urban Vault.

According to Knight Frank, Mumbai, NCR and Bengaluru were the leading investment destinations for office investments during the period.

The investments in office space are followed by the warehousing sector (21 per cent) and the residential sector (11 per cent).

A major factor that pushed the numbers for the office sector this year was the $1.4 billion deal between GIC and Brookfield India REIT to acquire two large commercial properties from Brookfield Asset Management's real estate PE division. It was announced in May this year.

According to Lata Pillai, managing director and head of Capital Markets (India) at JLL, the launch of India's first retail REIT is another important development for the office segment.

In March, Nexus Select Trust REIT was launched, owned by the global private equity giant Blackstone.

Notably, REIT is a company that owns, operates, or finances income-generating real estate. Like mutual funds, REITs pool money from investors and allow them to earn dividends from the real estate sector without having to own or manage any property themselves.  

Another real estate consultancy, Colliers India, released a report on REITs earlier this week. It said that the current penetration of REITs in India is 11 per cent and it has the potential to go up to 68 per cent.

This will be in line with other Asia-Pacific countries like Japan and Singapore where over 50 per cent of total investments in office space is under REITs.  

Currently, three listed office REITs cumulatively hold around 74.4 million square feet of office REIT stock, according to data from Colliers India.

"Considering the size of the Indian office market there exists a huge potential for more number of REITs and expansion of current REITs. The overall returns on listed REITs in India, including dividend yield, have been a major factor in the success of REITs in the country," said Piyush Gupta, managing director of Capital Markets and Investment Services, Colliers India.

In the current calendar year, the PE investments in the Indian real estate sector are estimated to touch $5.6 billion, 5.3 per cent higher than last year.

"Unlike other global gateway markets, India has consistently witnessed a steady growth momentum, which enhances investor confidence in the sector," says Shishir Baijal, chairman and managing director of Knight Frank. "Looking ahead, the office sector is expected to remain a favourite among investors, as it is likely to maintain its momentum in the short to mid-term."