Decoding India's Role In Shaping The Global Alternative Asset Landscape

Alternative asset classes are exploding in popularity, with the Global Alternative Assets Under Management projected to hit $23.2 trillion by 2026, growing almost 6 times since 2010. However, this rise in demand is not an overnight phenomenon; it was largely triggered by the global economic downturn of 2008, which drastically devalued traditional assets. In the past decade and a half, uncertainty has remained central to financial markets. Rising inflation and market volatility are compelling investors to look beyond the beaten path for alternative assets to get robust risk-adjusted returns on their investments and diversify their portfolios.

As the fastest-growing major economy, India is witnessing rapid growth in the alternative investments viz real estate and infrastructure, well-demonstrated by the ~15% allocation of investments by sovereign wealth funds and pension funds in India over 2022 and 2023. With lower operating costs, robust economy supported by young talent and consumption, the real estate sector is one of the most preferred investment options in the country. While the industry is experiencing a significant downturn globally, the sector remains resilient in India, with 25% increase in real estate investments in 2022 and 2023, as compared to 2018 to 2021.

However, for India to sustain this positive momentum, it's critical for asset managers to acknowledge the transformation in how people live and consume, a shift reshaping their approach to real estate. They must, therefore, align their assets under management with key trends such as digitalisation, decarbonisation, and technological advancements to position India as a global industry leader. 

Real estate can significantly contribute to a robust and sustainable economy in a higher inflationary environment. To capitalise on this opportunity and attract more investors, Indian developers are adopting a diversified approach and deploying more capital into sectors that cater to evolving consumer needs.  

Distressed Opportunities Will Gain Momentum

Until a decade ago, the distressed assets market in India was relatively unknown to investors. However, it has become one of the major sectors in the investment landscape today. The government’s introduction of the Insolvency and Bankruptcy Code in 2016 has been instrumental in encouraging the participation of both domestic and foreign investors in this market by providing a solid legal framework for resolving stressed assets. As of 2021, the total value of stressed assets in the Indian financial system was estimated to exceed $160 billion, presenting a significant investment opportunity for investors. 

While alternative investments in distressed assets have the potential for high returns, they also have associated risks and challenges. The large bid-ask spread due to increase in cost of capital over the last few years did create a challenging time, but with this gap narrowing, the distressed asset ecosystem in India is poised to witness significant growth in alternative investments in the near future. 

Digitalisation And AI Create Expansion In Real Assets – Data Centres And Warehousing Will Witness Growth

Digitalisation has become a key driver for the Indian economy. With work patterns, supply chains, and consumer needs becoming more technology-driven, the demand for digital infrastructure has expanded immensely in recent years. Propelled by the rising digital economy and the rapid adoption of technologies, such as AI, the data centre sector in India is emerging as a popular alternative asset class. The industry witnessed an expansion from 350 MW in 2019 to 853 MW in 2023 and is further projected to reach 1,645 MW by 2026. To achieve this exponential increase in capacity, the industry will require 10 million sq. ft. of real estate space and is estimated to attract $5.7 billion in investments. 

The growing digitalisation and increasing internet user base in India have also resulted in an e-commerce boom, driving the demand for an efficient supply chain infrastructure. As such, the warehouse sector in the country is projected to reach $35 billion by 2027, at a CAGR of 15.6% from 2022. 

Going forward, most developers are looking to leverage the power of AI and IoT to create a ‘phygital’ warehousing infrastructure to optimise efficiency and reduce labour costs. Reports suggest that more than 80% of warehouses in India will integrate varied levels of automation by 2030, positioning the sector as an attractive opportunity for investors in the digital landscape. 

Global Investors Will Forge Strategic Partnerships To Tap Opportunities Within Alternatives Sector In India

Government reforms and policies, such as the authorisation of REITs and InvITs as viable investment vehicles for foreign portfolio investors, have been instrumental in increasing their participation in India’s alternatives industry. This development opens up significant opportunities in the financial sector, attracting global institutional investors to form strategic partnerships with Indian real estate developers. As a result, the office space portfolio in the country is expanding, with Global Capability Centres seeing a notable increase in their share of total office real estate transactions, rising to 35% in 2023 from 25% in 2022. The domestic GCC market is projected to reach $110 billion by 2030, highlighting the sector's potential.

Mixed-use developments present another lucrative opportunity for investors as Indian communities increasingly value access to daily conveniences, proximity to prominent education and healthcare facilities, and the presence of a like-minded community. These factors make mixed-use developments a compelling investment, reflecting the growing demand for integrated living spaces.

The healthcare sector is also ripe with opportunities. Together with the diagnostic segment, it has attracted almost $9.8 billion of India's FDI equity inflows between April 2000 and December 2023. The sector is poised for further growth, driven by increased health awareness, improved access to health insurance, a burgeoning middle class with rising income levels, and escalating government spending on healthcare.

The increasing number of high income individuals are also contributing to the rise of luxury developments such as branded residences, penthouses, sky villas, and independent floors within well-equipped townships with sales quadrupling at a 75% YoY increase.

The upward trend is not restricted to this segment; as per reports, hotel investments in India surged to $401 million last year, marking an almost fourfold increase from the levels seen in the previous year.

Global investors are also betting big on India’s renewable energy projects. With 100% FDI permitted by the government, the sector received foreign equity investment of $ 6.1 billion between April 2020 and September 2023. By supplying the capital the renewable energy industry in India needs, foreign investors are hoping to leverage the country’s innovative technology for healthy financial returns.

While the tremendous growth prospects in India's alternative investment sector are undeniable, achieving sustained global dominance will require a paradigm shift in the industry's approach.

Asset managers must proactively anticipate and adapt to the rapidly evolving investment landscape, moving beyond traditional strategies. This necessitates embracing a data-driven mindset, leveraging advanced analytics and AI to identify emerging trends and tailor offerings accordingly.

Moreover, fostering an innovation-centric culture that encourages experimentation and calculated risk-taking is crucial to stay ahead of the curve. Ultimately, the Indian alternative investment sector's global dominance depends on its willingness to continuously disrupt itself, enabling it to fully harness the nation's economic potential and attract sustained investment.

Raj Menda is Chairman Supervisory Board at RMZ.

The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.