Cementing gains: Indian real estate sector sees strong inflows from domestic capital

• In recent years, the government's regulatory reforms have attracted increased participation from domestic financial institutions.
• Between 2010 and H1 2023, the sector has seen approximately $12 billion in exits through 267 deals.
• Real estate-focused AIFs have become a preferred choice for real estate investments among domestic institutions, UHNWIs, and family offices.

The Indian real estate sector, which has been having a positive 2023, is now looking poised for expansion, with the potential to tap into approximately $41 billion in domestic institutional capital, as per JLL's report titled 'The rise of domestic capital in Indian real estate'.

Over the last decade, the sector has attracted around $57 billion in institutional investments, with a substantial $46 billion of these investments occurring between 2015 and the first half of 2023, accounting for 81% of total investments since 2010.

Historically, the Americas were the dominant private equity (PE) investors in India, but due to concerns abou a looming recession, their share has significantly decreased from 52% in 2022 to 26% in the first half of 2023.

Nevertheless, as foreign institutional investors adopted a more cautious approach, H1 2023 saw an increase in domestic capital, helping to bridge the gap left by the reduction in foreign investments.


Regulatory reforms and govt initiatives drive investments

The introduction of regulatory changes, including the Real Estate Investment Trusts (REITs) guidelines in 2014, followed by the Housing for All Mission in 2015, the Real Estate Regulation and Development Act in 2016, the Benami Transactions (Prohibition) Amended Act in 2016, the implementation of the Goods and Services Tax (GST), and relaxation in foreign direct investment (FDI) norms, has significantly stimulated institutional investments in the Indian real estate sector since 2015.

In recent years, the government's regulatory reforms have attracted increased participation from domestic financial institutions within the real estate industry. Between 2010 and H1 2023, the sector has seen approximately $12 billion in exits through 267 deals.

Notably, domestic investors have played a substantial role in these exits, accounting for 73%, in contrast to the 27% facilitated by foreign investors.

The report also highlights that buybacks and secondary sales have been the preferred exit routes, representing 51% and 31% respectively over the past 12 years.

Furthermore, the latest REITs have witnessed growing involvement from domestic institutional investors, such as mutual funds and insurance companies, reflecting a rising interest in real estate from these entities, who have taken on anchor investor roles.

Says Lata Pillai, senior managing director and head, Capital Markets, India, JLL, “Domestic institutions are growing stronger due to sustained capital inflows enabled by the growing economy and a robust regulatory environment. We anticipate that investments from domestic institutions will become an important source of capital in the real estate sector in the years to come.”

Alternative investment funds playing a major role

Real estate-focused alternative investment funds (AIFs) have become a preferred choice for real estate investments among domestic institutions, UHNWIs, and family offices.

AIF-II category, as of December 31, 2022, had amassed an impressive $16.5 billion, reflecting a remarkable 91% compound annual growth rate (CAGR) since 2013 when it stood at $427 million. These AIFs injected roughly $16 billion into the real estate sector, significantly enhancing liquidity.

Insurance and mutual funds’ opportunity

As of March 31, 2023, life insurance companies had deployed approximately ₹10,867 crore, and general insurance companies about ₹1,845 crore in real estate.

These investments are just a fraction of the permissible allocation. Regulatory frameworks create opportunities for substantial long-term capital infusion, with insurance companies holding a potential of around ₹1.65 trillion for real estate investments.

Mutual funds also have the opportunity to diversify into real estate, encompassing investments in Real Estate Investment Trusts (REITs) and real estate company shares. However, these investments are capped at 10% of the net asset value (NAV) of the fund.

Private wealth can be a game changer

The population of ultra-high-net-worth individuals (UHNWIs), those with a net worth exceeding $30 million, is projected to surge by around 40% in the coming years, soaring from 13,627 individuals in 2021 to over 19,000 by 2026.

This surge in private wealth signifies a burgeoning segment in India, set to make a significant contribution to private domestic capital investments within the real estate sector.