Shobhit Agarwal's take on real estate trends, investment opportunities and more - VC Circle

How do you see M&A activity in Indian real estate over the next couple of quarters or the next year? Is the current momentum (around $2.9 billion in Q3) likely to continue or taper off?

We see between $6 billion and $8 billion come in every year. I think this year, too, we'll be close to that number.

What are the key trends within real estate M&A?

Within real estate, at the moment, the most favourable sector is industrial and warehousing. And it will keep the momentum going in the second half of 2025. To some degree, the sector is over-capitalized right now. There's more money chasing fewer opportunities. 

The second sector where there's a lot of demand but very little product is data centres. Every global player is already in India, dabbling with this one way or the other. Enough and more capital is chasing this sector. 

The third important trend is the office segment. There's not really too much play left, because now four REITs have come in. The fifth and sixth are in line. There is potentially another one in Delhi. 

About a third of all institutional stock available in the country is in REITs already. A lot of it in the pipeline is promised to go into REITs. Every developer who is building these offices, they're doing it for the REITs. The pipeline is pre-committed to the REITs. It takes away the opportunity of private markets. 

As a result, there is really not enough opportunity in the office space to buy and sell. What we are seeing is single-asset sales are starting to take place, which are of smaller size. These are assets less than Rs 1,500 crore enterprise value. Some are even smaller than Rs 1,000 crore. These are getting piped into domestic managers. 

This is a new trend. There are now at least four or five domestic funds that have come in, either only for real estate or for real assets, in which they can buy income-yielding core assets. Domestic capital has started to support and hold core office assets. This will keep the market going.

Is the interest in commercial real estate likely to extend significantly to the housing market?

In terms of residential, credit continues to dominate. Everybody in residential, other than developers, prefer to put debt than equity. There are many reasons for it, but there is a structural reason: residential projects are for sale. They throw cash while they're being built. There's an opportunity to repatriate it. Leaving it in the bank account doesn't make any sense. You'd rather repatriate it. 

It poses a different sort of risk, whereas in the office space or any for lease sector, there's a point of entry and a point of exit. You come in at the start of the project, you build out the project, you lease it, and one day you decide to sell it, and all the money comes to you in one day. You deal with your taxes on the point of sales, not every year for four years. It becomes complicated from a tax perspective… which the funds don't appreciate. It becomes more operative, more intense for them than a single point of entry and a single point of exit.

Will investments in sectors like warehousing and data centres continue to be largely foreign fund-led, or will domestic fund activity increase? What about offices?

Two sectors will be led by dollar-denominated money, which is warehousing and data centres. The office segment will be a mixed bag. But it seems like this year, rupee-denominated money may lead. Because the dollar-denominated money looks for large-scale investments. We don't have that scale here. Everything is getting piped into a REIT. As a result, there is not enough supply of large-scale deals. The play is under Rs 2,000 crore and the equity value will be Rs 1,200 crore, which is not significant for large-scale investment.

With assets being piped into REITs and more capital than assets available, will this create valuation issues for REITs in India? Will they take a long time to reach reasonable values?

Yes and no. There are two ways to make money in a REIT: either you get cash yield, which is dividends, or appreciation on the unit price. Most of these REITs at listing are rated out between 7% and 8%. If the unit price rubs up, dividend will go down to 5%. Because the dividend is fixed, coming from rents. 

Rents don't change if per unit capital price goes up. Rental yields may come down, but I'm gaining on appreciation. Total returns, which is dividend plus capital appreciation, will be more or less the same. We should go for mid-teens. I still think we make mid-teens one way or the other. It doesn't matter. Either you're playing the appreciation game or you're playing the dividend game.

Some players like Actis have recently exited real estate assets, while others like Blackstone and CapitaLand remain active. Is this normal churning or are some exiting India because it's no longer lucrative?

Most of the real estate sector has literally no open-ended fund, whether rupee or dollar. They are all closed-ended. Depending on where you raise the money, the fund life varies between five and 10 years… The closest you get is sovereigns who do not have an exit pressure… Actis has to sell because they have spent a decade on it. They should have sold two-three years ago, but there was COVID. 

Why are there no open-ended funds in Indian real estate? Is this specific to India, and will it ever change?

It is the nature of the underlying asset. You start building the project; as you build, the risk reduces. At some point, tenants or owners come in, and the project has delivered a certain return for commensurate risk. After that, it goes into a stabilized phase, which is not for private equity that likes to enjoy an upside… A stable asset is annuity-type. People have to change the color of money. Hence, the finite period on real estate funds. 

It is a global phenomenon. Even in the US, Europe, or Australia, all real estate projects are guided by closed-ended funds as opposed to infrastructure, which could be open-ended. There is only one opportunity that could change this: if we start to build-to-lease residential. That means income in perpetuity, demand in layers, opportunity to re-rate, risk super-fragmented (a million square feet will have 300-400 tenants). On a stabilized basis, I can keep going up and down. It is not like an office asset where Amazon leaves and half my project is empty. It is analogous to investing in transmission: an asset in perpetuity.

Do you see build-to-lease residential happening in India? What policy changes are needed?

The industry is liaising with the government to bring about a policy change. Decades ago, the government brought a law that favors the tenant (Tenancy Act) to stop landowners from hoarding properties. That law has remained unchanged. Unless you neutralize it—not make it landlord friendly, but neutral: if the tenant defaults, I have the ability to throw him out without going to the judiciary or police. 

It could work prospectively for future properties. With sufficient notice, if some resident is not paying rent, he has to walk out without litigation. No fund wants to get into litigation. The government understands but it's not a priority. It is a state subject, so it will take time. Both developers and investors are coming together to talk to the government to change this from tenant-heavy to neutral.

How serious an opportunity are data centres, especially with Google’s $15-billion commitment?

All our data centre capacity put together in India is less than 1 gigawatt. Google is going to double that effectively with just one centre. One-sixth of humanity is in India; so much data is generated. One gigawatt cannot be right. We should be at 5-10 GW. With all future data centres announced, we will probably reach 4 GW, and it will take three years to build. The headroom is endless. By the time we reach 9 or 10 GW, maybe Google will need 10 gigawatt just for itself. China is already beyond that. Data is the new solution.

Are there policy hiccups for data centres?

No, every state has understood; there is interplay among states to promote data centres. There are two essential ingredients: energy surplus (data centres cannot afford shutdown) and connectivity. Water is a smaller issue.

Will luxury housing have a significant REIT play?

It cannot. For an REIT, it is very important to get rents. In luxury, there is no rent because it is all for sale. Not even serviced apartments, because they are part of hospitality, not real estate. If at all, they will go to InvITs and get treated as infrastructure.