Indian office properties continued to attract the highest amounts ofinstitutional investmentsin the year 2020 led by higher visibility in asset pricing, sustainedrecoveryand the Real Estate Investment Trusts-aided funding momentum.
While most investors remained cautious as asset pricing and revenue stability became challenging, large portfolio deals during the last quarter led to total investments of over $5 billion during 2020. The office space with a total deal valuation at $3.1 billion led the pack among asset classes in real estate, showed a JLL India report.
The primary markets witnessed a strong response to listed REITs, providing a new avenue for retail and institutional investors.
“India’s emerging REITs market is expected to attract cross border flows and further improve transparency and asset pricing leading to more mature markets. This loop of increasing maturity and capital flows will lead to investments scaling new peaks. Office market is on its road to recovery as it is likely to witness an increased number of new completions of close to 38 million sq ft, while net absorption is likely to hover around 30 million sq ft,” said Samantak Das, Chief Economist and Head of Research,
The REITs market has been the biggest catalyst to keep investment momentum up. Foreign investors who are looking for stable yield and regular returns, have been able to see the benefits of a good sponsor quality, track record, transparency and delivering predictable returns in the REITs market. Landlords owning income yielding core office assets have been forming strategies to list their assets through REITs. Listing of new REITs is expected to provide opportunities for institutional investors to build asset portfolios or co-invest with existing platforms before the IPO.
The provision of the Union Budget 2021-22, allowing to raise debt from foreign portfolio investors at low cost will lead to more asset acquisitions by REITs. Office assets are expected to the preferred option due to stable rental yields and income visibility.
Asset pricing is expected to improve with resumption of full economic activity during the year. Core office assets with steady incomes are likely to benefit from better price discovery. On the other hand, opportunistic assets are expected to witness more price adjustments as they lack income certainty and entail more risk.
Business activities resumed with the gradual opening of the economy in the third quarter of 2020 and the office market witnessed green shoots of recovery. Sentiments improved further in the last quarter of 2020 with the news of potential vaccine development, and the office market continued its recovery momentum. Net absorption increased by 52%, while new completions grew by 39% when compared to the preceding quarter, said the report.
Vacancy in grade A office spaces in India have stayed below the 15% mark since 2017. Even during a pandemic riddled year, vacancy increased marginally and is expected to remain range-bound in 2021 as well. Given the range-bound vacancy levels, office rents in 2020 remained stable across the seven major office markets in India. However, landlords did consider the situation and were more accommodating to the demands of occupiers.
According to JLL India, landlords across markets were more flexible in providing increased rent-free periods, reduced rental escalation and fully furnished deals to prominent occupiers that reduced their net outgo. But the reduction of headline rents was not a popular phenomenon. With stable rental values and low vacancy levels, the office market in India will continue to be characterized by strong fundamentals in 2021.