Effect of Startup Culture on Commercial Real Estate
The commercial real estate market in India is growing quickly. It is expected to grow from US $ 200 million in 2021 to $ 1 trillion in 2030. This would make it the third-largest economy in the world, and some of this effect is courtesy of the startup culture.
India’s commercial real estate market is well-organized and very competitive. The rising economy, digitalization, IT/ITeS sector growth, and different government reforms (industrial corridors, FDI policy, RERA, REITs) have led to more demand for commercial real estate space. As the government lifted FDI rules, a lot of funding came in from around the world. This helped malls and other organized retail spaces get built. At the same time, the digital economy and e-commerce led to more demand for coworking office spaces, smart warehouses, and logistics hubs.
A Colliers report called “Foreign Investments in Indian Real Estate Turn a Corner” mentions that the amount of foreign money going into real estate tripled between 2017 and 2021, reaching $24 billion. In the last four or five years, investors worldwide have become more interested in investing money in Indian real estate.
The reasons for the rise in foreign investments are as follows:
- Strong demand for Grade A office space
Multiple multinational corporations and significant Indian corporates and brands established headquarters in the business districts of important Indian cities. It has increased investor confidence due to India’s sharp improvement in the ease of doing business ranking.
- Relaxation of the FDI regulations
While 100% foreign direct investment has been allowed in townships, homes, and built-up infrastructure since 2005, the Government of India decided to lower the minimum built-up area, capital requirements, and exit standards for foreign investment in the construction industry in 2014.
- The large inflow in the “prop-tech space.”
Growth in the rate of the logistics and industrial asset segment, driven by a strong need for warehouse spaces from e-commerce and third-party logistics firms—led to industrial and logistics assets getting many foreign investments in the real estate sector in 2021.
- Real Estate Investment Trends (REITs)
Alternative investment vehicles like Real Estate Investment Trusts (REITs) provide much comfort to foreign investors. It includes low risk, good opportunities for capital appreciation, and regular income. Even though REITs are a relatively new way to invest in Indian real estate (the first Indian REIT, Embassy Office Parks, was only granted in March 2019). The success of the REITs already out there has made people hopeful about the growth of the Indian REIT market.
The government has started several important reforms to help the commercial real estate sector grow.
National Industrial Corridor Development Programme
The National Industrial Corridor Development Programme is the first infrastructure program in India. It aims to develop new industrial cities as “smart cities” and link updated technologies to several infrastructure sectors so that India can compete with the best places in the world for manufacturing and investment. This government plan would increase investment in the commercial real estate market, which would create jobs and help the economy grow. This would result in overall socioeconomic development.
This program is a comprehensive plan with a budget of US$ 2.41 billion (Rs. 20,084 crores), of which only US$ 0.73 billion (Rs. 6,115 crores) has been spent so far. As part of the National Master Plan for multimodal connectivity, the Cabinet Committee of Economic Affairs (CCEA) agreed to build 11 industrial corridors with 32 nodes/projects that will be built in four phases by 2024-2025.
Increase in the Demand for Data Centre Space
In addition to giving the data center industry infrastructure status, the Indian government recently made data localization strategies. These actions will likely encourage the development of new data centers in the nation.
Since 2017, the proportion of investments made by the US and Canada in foreign assets has increased by more than 60% annually.
The US and Canadian funds still support industrial assets in India in addition to commercial and mixed-use buildings, despite the challenges brought on by the pandemic. Similarly, most investments from Asia are concentrated in the office, industrial, and logistical sectors.
Real Estate Regulation Authority (RERA)
The Real Estate (Regulation and Development) Act 2016 created RERA to protect home buyers and encourage real estate investments. RERA creates a state authority that oversees residential and commercial real estate operations. Before RERA was put in place, there wasn’t a specific law regulating the real estate sector, so people had no fast way to fix their problems. Instead, developers had to undergo a complicated process of getting authorizations and sanctions from different authorities, leading to delays and higher costs. RERA helps by making the registration process easier, resolving complaints quickly, making the real estate industry more accountable and open, and promoting the real estate sector. The Act’s proper regulatory mechanism also boosts the confidence of financial firms, FDI, and External Commercial Borrowings, leading to more real estate investments.
Key Market Trends
Developers are hopeful about a healthy recovery in office leasing activity due to the employers shifting office locations to accommodate the growing demand for coworking space. Major Indian cities experienced an increase in the supply of new office space during January and June 2021.
Within the first half of 2021, Bengaluru experienced a two-fold increase in the supply of new office space, from 3.35 million sq. ft to 9.53 million sq. in 2020. ft between January and June 2021. In Hyderabad, new office space increased by 3% yearly, from 3.73 million square feet to 3.84 million square feet.
Foreign investors considering investing in real estate projects in India should familiarize themselves with the sector’s unique features and nuances to ensure they get the expected returns. Despite this, Indian real estate is likely to remain a highly sought-after investment opportunity for various reasons. It includes the Government of India’s strong focus on and significant investment in the improvement of infrastructure, which will probably have a multiplier effect on the real estate industry and the rising ease of low-risk investment through channels like REITs. International investors currently support many well-known Indian developers, and it is anticipated that this pattern of international investment will continue to grow, courtesy of the effect of startup culture.