Indian real estate needs capital to scale and grow

Bengaluru: India’s real estate boom is sharpening a familiar constraint: capital. As demand consolidates and developers look to scale, the need for formal funding is rising across asset classes.

At a fireside chat on “Returns, risks and exit routes for investments in real estate” at the Mint India Investment Summit 2006 held in Mumbai last week, Vipul Roongta, managing director and chief executive, HDFC Capital Advisors Ltd, and Ankur Gupta, deputy global chief investment officer, head of APAC and Middle East, Real Estate, Brookfield, outlined how this funding gap is shaping investment strategies across housing, offices and hospitality.

For HDFC Capital Advisors, which has funded around 400,000 homes, consolidation in residential markets is pushing developers towards institutional capital as they expand.

“Residential real estate accounts for nearly 75% of India’s real estate market today. To understand where demand is coming from, it is clear that the market is consolidating towards the top 10–12% of each region. It is bringing developers to funds like us for expansion, land acquisition, approvals. We manage $5 billion of assets and we are seeing more deals now with the market tapering in some geographies. The demand for formal capital is clearly going up,” Roongta said.

For Brookfield, India’s relatively small real estate base underscores the scale of the opportunity, and the capital required to unlock it. The firm, which entered through commercial office assets, has since expanded into hospitality, rental housing and a real estate investment trust (Reit), and is also eyeing logistics.

About growth, scale

“Real estate investments are about growth, scale, and housing the economy—whether through the residential sector or commercial real estate. To put India in a global context, the (real estate) sector is worth about $60 trillion globally, while in India it stands at roughly $0.5 trillion. Our fair share of built, rent-producing real estate should be closer to $5 trillion, but we are currently at about a tenth of that. The fact is, we need significant capital to build out real asset infrastructure and push the economy further,” said Brookfield’s Ankur Gupta.

Within housing, this capital is increasingly flowing to the premium end, as supply and sales in affordable segments remain under pressure.

“The challenge in determining what qualifies as affordable housing lies in the term itself. ‘Affordable housing’ is defined differently by various stakeholders—the government has one definition, the Reserve Bank of India another, and the Income Tax framework yet another. At HDFC, we chose to focus on the middle-income segment, which for us includes households earning between ₹50,000 and ₹3 lakh per month,” said Roongta.

Bright spot

HDFC Capital, which does both equity and credit deals, sees private credit as a relative bright spot in India, helped by more conservative structures.

“Globally, private credit is going through one of its toughest phases. But in India, the story is different. In the Western world, private credit is often structured with leverage at the asset level or in other ways. In India, however, leverage is not allowed at the fund level, so the structures are largely unlevered, and investments are senior secured. With the institutionalising of capital, private credit or senior secured credit is doing well because the underlying asset quality is good,” Roongta added.

Alongside housing, commercial office has rebounded strongly since the pandemic, reinforcing investor interest.

“We helped in creating the sector in some ways. We are among the largest owners of office assets in the country, and have been one of the largest foreign investors in real estate for many years. I would still say that the best years of real estate are today and in the years ahead of us, simply because there is so much opportunity,” said Gupta.

“Our broad investment theme is the urbanisation of India manifesting itself in office spaces, hospitality. The real estate markets are getting institutionalize and Brookfield likes that. As investors, if we solve for the present, we will make good returns,” Gupta added.

Even so, both Gupta and Roongta acknowledged a growing affordability challenge for homebuyers, even as demand remains strong.

That tension, rising demand alongside constrained affordability, leaves housing supply as the sector’s largest private-sector opportunity, but one that will hinge on the availability of capital.