Global investor sentiment on Indian real estate sector remains robust: Colliers report
While investor sentiment remains strong in Indian real estate, challenges persist in generating favourable returns compared to the cost of capital. In Bengaluru, transaction volumes remained stable, with smaller but resilient deals leading to a marginal drop in office cap rates
The Q3 2023 APAC Cap Rates Report from Colliers underscores that markets across the Asia Pacific region are grappling with interest rate pressures. While global investor sentiment remains robust concerning the Indian real estate sector, it continues to present challenges in terms of generating favourable returns relative to the cost of capital. According to the report, in Bengaluru, transaction volumes remained on par with the previous quarter. Individual investors were the driving force behind several transactions, as institutional players exhibited reduced activity. Although deal sizes were relatively smaller, they demonstrated resilience, leading to a marginal decrease in the cap rate within the office segment.
The Mumbai retail sector is poised to witness increased activity in the near future. This upturn is expected to be fueled by demand from the luxury segment and the introduction of additional supplies of high-quality organized retail assets. Notably, Mumbai's industrial demand remained robust during Q3. The compression in the cap rate is attributed to the limited availability of Grade A industrial stock. Moreover, large institutional investors have shown a positive outlook for the sector, and they are willing to accept lower current yields in exchange for the anticipation of future sector growth.
Ajay Sharma, Managing Director of Valuation Services, highlights the evolving landscape: "Given that the RBI has not changed the rate stance over the last 8 months with inflation range bound, the trend of fully leased CRE as an investment for inflation hedge has cooled, expanding investor interest into under-development and alternative assets. Further, yield compression has slowed considerably
Moreover, the deceleration in yield compression suggests that the return on investment (ROI) cycle has reached its peak, with optimal valuations already attained. Although there is a notable slowdown in yield compression, industrial assets still attract promising investments, Sharma said, adding, however, that the prospect of any significant change in this trend will largely depend on the intervention of macro-economic factors
The Scenario in China
In China, the report states that investment activity remains subdued, with only individual investors and insurance institutes actively seeking discounted assets and adopting a cautious investment approach. This has resulted in subdued market sentiment in the property sector for Beijing and Shanghai compared to Q2. To stimulate the market environment, China's central bank has been lowering the Loan Prime Rate (LPR) to ease the burden on loans, with the aim of unlocking resources for consumption and promoting nationwide GDP growth.
For Beijing and Shanghai, the industrial sector has witnessed a surge in new supply while the take-up of existing stock has decelerated. The government's release of additional industrial and logistics land has resulted in an augmented supply in the market.