Revival 2020 – Outlook commercial space investment

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The Indian real-estate sector is considered as one of the fastest-growing in the world. Its growth is also very critical for the Indian economy. Demand for office spaces, rising demand for urban & semi-urban accommodations, and growth of the corporate environment are contributing to the growth of the real estate sector.

Real estate is the second-largest employer in India after agriculture and is expected to grow at 30% over the next decade. Be it commercial real-estate or residential real estate, the overall sector has been benefited by major policies introduced by the current government.

The real estate sector is expected to reach a market size of $1 trillion by 2030 from $120 billion in 2017. The sector is expected to contribute 13% to the country’s GDP by 2025. Urbanization, the changing business landscape, favorable government initiatives, and substantial progress in ‘Ease of Doing business’ rankings are some of the factors contributing to the overall growth of the sector.

There have been numerous ups & downs in the real estate sector. The sector witnessed a massive slump during demonetization (8th November 2016) which resulted in dropping sales, a growing number of unsold properties, and challenges with heavy liquidity. Though demonetization had an impact on the sector, it resulted in better governance of the real estate sector and expectation of a higher percentage of Foreign Direct Investments (FDI) into the market through electronic transfers.

The central government in coordination with the respective state governments has taken numerous initiatives to encourage development in the sector. The introduction of Make In India, RERA (Real Estate (Regulation and Development) Act, 2016), GST (Goods & Services Tax), PMAY (Pradhan Mantri Awas Yojana), and creation of National Urban Housing Fund, and Housing for All restored much need transparency in the sector and instilled confidence in home buyers. The approval of Rs. 25,000 crore bailout-fund has brought the cheer to the real estate sector as the amount is expected to revive at least 1,600 stalled projects.

Sectors like IT, ITES, e-commerce, consulting, and retail have contributed to the growth of commercial real estate. Co-working spaces (also referred to as Flexible working spaces) witnessed a 277% rise in Q1, 2019. Leasing by co-working workplace operators crossed approximately 4 million sq. ft. across eight major cities in the first half of 2019. As per the report titled ‘Indian Real Estate’, The co-working story which is a global phenomenon has now taken root in India.

As per a survey by Collins International, investors are extremely confident about the growth of the commercial office market in 2019 and favorable business policies are acting as a catalyst to the growth.

Below are some of the upcoming trends that would drive the growth of the commercial real estate sector in 2020:

Rise in Shared (co-working) Workplaces

The rise in the gig economy, growing startup culture, community-driven eco-system, and rapid urbanization are some of the driving factors leading to the growth of co-working spaces in India. The growth will continue to propel in 2020 as large IT enterprises also want to leverage the advantages of the eco-system that can be found in shared workspaces.

The co-working segment is already attracting attention from global investors. Flexibility and lower rentals are the major reasons why co-working spaces are preferred by corporates, startups, and freelancers.

Development of alternate assets

Nearly half of the country’s population is under the age of 25 and many of them are moving to cities for seeking better opportunities. The shortage of affordable housing options and unsold residential inventory has led to the rise of the co-living sector. Residential properties are equipped with a range of lifestyle amenities for shared accommodation.

Though co-living is at an infancy stage, it is slowly gaining momentum. The market is expected to grow at a CAGR of 17% in the next five years touching nearly Rs. 1-trillion.

Growing impact of REIT (Real Estate Investment Trusts)

Policy changes aimed at improving the ease of doing business coupled with the introduction of REIT (Real Estate Investment Trusts) has created a positive investment atmosphere in the real estate sector. REIT provides a unique opportunity as it does not limit investments in commercial real estate only to institutional investors. With the advent of REIT, retail investors can now invest in a Grade-A office space or retail space location as the minimum investment is kept low.

REITs are expected to improve the fund availability for real estate developers as capital can be raised from investors against the issue of their completed units. The demand for commercial real estate will further rise in sectors like IT and manufacturing due to growth opportunities created via REIT.

REITs are less volatile when compared to other investment options like Mutual Funds, Stock Market, etc. and it will play a major role in the growth of commercial real estate in 2020. As per a report by Cushman & Wakefield, the REIT sector in India has the potential to reach a market capitalization of USD 20 billion by 2020.

Demand for manufacturing and efficient logistics solutions

The logistics sector is witnessing a huge demand with the rise of B2B (Business to Business) commerce in India. The warehousing and logistics sector showed exponential growth with the advent of B2C commerce and now that growth is fueled by B2B commerce.

The logistics sector alone has witnessed a capital infusion of $6.25 billion in the first five months of 2019. Macroeconomic factors, last-mile delivery, and tech-led innovations are reshaping the logistics sector. As per a report, the demand for industrial real estate is expected to touch 14.8 billion square feet from 850 million square feet by the year 2023.

To conclude, the commercial real estate sector is witnessing a major shift due to the introduction of favorable policies, urbanization, and innovative business models (co-working, co-living) that would drive its growth in 2020 & beyond.

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