Indian Commercial Real Estate Makes Hay Amid US-China Tensions

A shift is underway in the Asian commercial real estate landscape. Once a dominant player, China has long faced headwinds from a prolonged economic slowdown.

Though some of these woes might be behind them, industry experts say rising geopolitical tensions with the US are prompting a potential reassessment of investment strategies by foreign investors in China's commercial real estate market. This recalibration is leading to increased interest in alternative markets, with India emerging as a potential frontrunner for investment inflows.

Tale Of Two Countries

While foreign institutional investors have been bullish on Indian real estate, they have been cautiously diversifying their Chinese investments.

Institutional investments in Indian real estate reached $1 billion in the first three months of 2024, with foreign inflows accounting for a dominant 55% share, according to a Colliers report.

In China, however, commercial real estate investment volume declined 37% quarter-on-quarter and 23% year-on-year, CBRE said in a report. "Institutions and property funds remained cautious, accounting for just 17% of total transaction volume."

Jones Lang LaSalle documents a decline in foreign-investment activity in China as well, with many transactions involving office assets offloaded by foreign investors.

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'China Plus One' Equals India

Industry experts attribute this trend to the ‘China plus one’ strategy.

China Plus One is a strategy that global businesses use to spread their eggs across multiple baskets. Instead of solely relying on China for operations, companies are looking to diversify their manufacturing base across other developing economies, such as India, Thailand, Turkey and Vietnam.

"There is a clear-cut trend of investors withdrawing from China," Piyush Gupta, managing director of capital markets and investment services at Colliers India, said.

"Global companies, which have a large base in China, are definitely looking at alternatives because of geopolitical tensions," he told NDTV Profit. "India has emerged as a favourite here and we have seen a lot of deals closing on that front. The euphoria on the industry-end is real."

Viral Desai, a senior executive director at Knight Frank India, echoed this sentiment, saying that a potential revival in Chinese real-estate markets would not dampen the spirits that global investors have for India.

"Though China might see some revival in its real estate market, global investors are looking at the importance of diversification to be protected from geopolitics-induced volatility," he said. "Can't have everything in China."

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Beyond The Equation

Beyond the 'China Plus One' factor, several other trends are propelling India's commercial real estate boom:

Rise of Global Capability Centres: India's IT industry is attracting a growing number of GCCs. A Knight Frank report highlighted a 10% increase in the GCCs' share of leasing transactions in 2023.
Shifting Investment Preferences: Investments are increasingly focused on ready assets like office buildings and logistics warehouses. "From 2015–16, there has been a shift of global capital to ready assets rather than residential. Offices have been the frontrunner here. Logistics and alternatives have also taken up," Gupta said.
Focus on REITs: JLL reports that foreign investors are primarily acquiring assets via real estate investment trusts, with global and Singaporean investors making up the majority of transaction volumes in the past 12 months.
Attractive Rupee Valuation: Desai highlighted the advantage of the rupee's valuation for foreign investors. "The dollar-to-rupee equation is really attractive for an institutional investor since it is among the most stable APAC currencies."

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Investor Confidence On India Growth Story

Investors are willing to take on the development risk in India to get return on their assets, according to Shobhit Agarwal, chief executive officer of Anarock Capital.

He attributed this confidence to new guidelines and products like SM-REITs that are giving more opportunities for institutional investments and also enhancing market transparency.

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Challenges Ahead

Agarwal pointed out that a stronger US economy already started diverting some dollar investment away from Indian commercial real estate. But the Anarock CEO's overall sentiment still remains bullish as he sees domestic institutional flows continuing to pour in into the sector.

Also Read: Real Estate Sees Private Equity Inflows Drop 16% In Fiscal 2024, Says Anarock