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    Impact on businesses & wealth erosion expected to weigh on investment decisions of HNIs: JLL

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    has been one of the oldest and preferred investment avenues for the investor segment. In India, is preferred due to its tangible nature, stable income, steady returns and collateral value. These investments have undergone a transition over the last decade and offices have become one of the most preferred choices now. India has more than 600 million sq ft of Grade-A office space across its top seven cities in Q1 2020, and saw record absorption, steady rentals and low vacancy levels until the onset of the global pandemic.

    “Real estate, which plays the dual role of contributor as well as a beneficiary of growth, will prove to be the most important asset class in the HNI portfolio due to its tangible nature and associated wealth indication. Furthermore, the nature of investments within real estate has seen diversification with higher allocation towards commercial assets and investments in publicly traded Real Estate Investment Trusts (REITs), helper investors re-imagine deployment strategies,” says Ramesh Nair, CEO & Country Head (India), .

    The study of investments in real estate, which accounts for the largest share of the HNI investment pie after equity, forms the basis of this report. The COVID-19 pandemic has impacted all economic activities, and investments are being held back due to a high level of uncertainty in the market presently. The impact on businesses and wealth erosion is expected to weigh on the investment decisions of . JLL sees challenging times ahead and it is perhaps the best time to think through our investments and make insight based decisions.

    Real Estate – The Most Preferred Investment Option After Equities

    Portfolio diversification is universally followed as an investment dictum and wealthy investors are no exception. These allocations tend to maximise returns, while trying to manage the associated risks. Asset classes like equities and real estate have been through a cycle of volatility following the global financial crisis and have emerged as key assets in the global HNI portfolio.

    Real estate accounts for 23 percent share of Global HNI investments in 2019: Equities account for the highest share of investments at 28 percent due to their long-term return potential, reflecting the risk taking abilities of HNI investors. Equity investments are preferred by investors as they are more liquid compared to other asset classes

    • Real estate investment, due to its tangible nature and associated wealth indication, continues to be a traditionally favoured asset class with 23 percent share. The nature of investments within the asset class has witnessed diversification with more allocation towards commercial assets and investments in publicly traded Real Estate Investment Trusts (REITs).
    • Stable income with a principal protection objective has been achieved through investments in bonds, which accounts for 16 percent share. The allocation towards this asset class acts as a hedge as its returns improve when equity markets decline.
    • Global uncertainty, slower economic growth and trade tensions have led to investors preferring to stay put in cash and cash equivalent, forming 19 percent share.
    • HNIs with a high risk appetite have been investing in private equity as it offers superior risk adjusted returns as well as access to new technology driven ventures.

    Equities account for the highest share of investments at 28 percent due to their long-term return potential, reflecting the risk taking abilities of HNI investors. Equity investments are preferred by investors as they are more liquid compared to other asset classes

    • Real estate investment, due to its tangible nature and associated wealth indication, continues to be a traditionally favoured asset class with 23 percent share. The nature of investments within the asset class has witnessed diversification with more allocation towards commercial assets and investments in publicly traded Real Estate Investment Trusts (REITs).
    • Stable income with a principal protection objective has been achieved through investments in bonds, which accounts for 16 percent share. The allocation towards this asset class acts as a hedge as its returns improve when equity markets decline.
    • Global uncertainty, slower economic growth and trade tensions have led to investors preferring to stay put in cash and cash equivalent, forming 19 percent share.
    • HNIs with a high risk appetite have been investing in private equity as it offers superior risk adjusted returns as well as access to new technology driven ventures.

    Real Estate Investment in 2019

    • 26 percent of overall Indian HNI investments in real estate
    • 67 percent of Indian HNI real estate investments in office space
    • India’s second IPO over-subscribed by 13 times in July 2020
    • Strong investor appetite for office assets

    Source: Top of the Pyramid report 2017, Kotak Wealth Management, JLL India Private Wealth Group survey, National Stock Exchange and JLL Research

     

    Indian HNIs More Aggressive On Equity And Real Estate Investments

    Indian HNI follow similar investment trends in real estate as their global counterparts. However, the allocation towards equity has been higher than the global trend. An analysis of the investment trend during FY 2013 to H1FY 2018 indicates the following trends. Equity investments enjoyed the highest allocation, witnessing highest share due to the appreciation in Indian equity markets during the period

    • Real estate investments enjoyed the highest allocation by HNIs due to their tangible nature, stable returns, and security. Investments in real estate have moved from traditional residential segment to commercial office space, high street retail and warehousing
    • The lowering of risk perception due to economic growth during the above period led to HNIs reducing their allocation to debt funds as returns declined in line with reduction in policy rates
    • Alternative investments saw sharp increase in share as investors tried to increase returns by investing in new ventures and alternative investment funds

    Annuity Income From Real Estate Picks Up Momentum For Indian HNIS

    Investments in various segments of real estate are reflective of the return potential from each segment. Residential real estate, which once occupied the highest share, has given way to commercial office space and warehousing on the back of robust growth over the years. Some of the trends in real estate investments are as follows:

    Investments in office space became the first choice for property investors. India’s Grade-A office stock of more than 600 million sq ft, spread across its top 7 cities, was preferred by institutional investors as well as HNIs due to stable annuity returns and possible upside due to capital appreciation.

    India’s retail segment, particularly high street retail, is another preferred option as it offers higher annual returns, high demand and better capital appreciation. The segment offers options to invest in traditional as well as emerging locations across India’s leading cities. Residential segment, which delivered high returns during the pre-GFC phase, went out of favour as it went through a series of real estate reform measures initiated to increase transparency. Warehousing evinced strong interest owing to automation & tax reforms like the Goods and Services Tax or (GST). Growth of e-commerce due to increased online shopping also led to increased demand for modern warehousing facilities.

    Embassy REIT: Laying The Foundation For India’s REITs Market

    India witnessed the launch and successful listing of its first REIT by a joint venture (JV) of Blackstone and Embassy in April 2019. The performance of the first REIT has put to rest all the apprehensions and is likely to lead to the listing of more REITs in India. The success of the first REIT has bolstered the confidence of other developers and investors, primarily with a commercial office portfolio, to list their assets under a REIT platform.

    Mindspace Business Parks REIT, backed by Developer and Blackstone group, the second listed REIT in India witnessed strong investor interest as its initial public offering was over-subscribed by 13 times in July 2020. The institutional investor portion was oversubscribed by 10.65 times, while rest of the portion was over-subscribed 15.83 times. The issue witnessed participation from various foreign and domestic institutional investors like GIC, Fidelity, Capital Group and Fullerton. The REIT has a portfolio of 29.5 million sq ft of commercial properties located across major cities, such as Mumbai, Pune, Chennai and Hyderabad, out of which around 24.5 million sq ft area has been constructed.

    Embassy Office Parks REIT comprises 26.2 million sq ft. of completed and operational commercial properties across India. With approximately 7.1 million sq ft of on-campus development in the pipeline, the total portfolio spans 33.3 million sq ft across seven Grade A office parks and four city-centre office buildings in India. The REIT has appreciated by 23 percent over the allotment price of Rs 300 per unit issued in April 2019 (Exhibit 13). Rental collections have been marginally impacted by COVID-19 as rent collections from office occupiers stood at 92 percent of the total collections for the month of April 2020.

    India’s commercial office segment has been the favourite asset class of institutional investors over the years. This is evident from the fact that nearly US $20 billion has been invested in the form of direct investments during 2005-2019. A detailed analysis of the office market based on asset ownership, property size, leased space and asset quality has been used to arrive at REIT-worthy office spaces.

    The likely REIT-worthy office assets in India have been estimated on the basis of two important factors-single ownership and larger floor space with high occupancy rates. JLL Research estimates that 270-mn sq ft of office stock would be eligible for REIT. This would translate to a potential investment of ~ US $33 billion.

    Key Highlights Of India’s REIT-Worthy Office Space Assets

    Cities REIT- worthy Stock Share ( 270 mn sq ft) REIT- worthy stock value share
    Bengaluru 30% 28%
    Delhi-NCR 19% 20%
    Chennai 13% 13%
    Mumbai 13% 20%

    The Road ahead

    Real estate continues to be the traditionally favoured asset class of HNIs, with 23 percent share of their total investment pie. Investments in real estate have evolved over the decades with various emerging forms. Office space investments have emerged as the most preferred segment for Indian HNIs, accounting for 67 percent of their total investments in real estate. India’s office segment has witnessed robust growth over the last four years with the average annual net absorption crossing 30 million sq ft levels, leading to steady rental and capital appreciation. The listing of India’s first REIT heralds the institutionalisation and increased maturity of office space segment. Overall, office market fundamentals are expected to remain robust due to very low vacancy rates and limited upcoming supply. The segment is also expected to recover the fastest once the pandemic comes under control.

    The analysis of investments in India’s office space indicates attractive pre-tax IRR of ~23 percent. HNIs can invest in strata office space, which is estimated to be ~180 million sq ft and worth ~Rs 2.26 lakh crore (USD 30 bn) as of January 2020. Investment opportunities are currently overshadowed by the unprecedented challenges created by the ongoing COVID-19 pandemic. Many HNIs who had invested abroad or created overseas trusts want to bring their investments back to India. Family offices are expected to take stock of their investments once the pandemic is contained and the lockdown is lifted. Although the current situation has put all investments in pause mode, those with a long-term outlook can use this period for bargain deals at attractive valuations.