The Indian real estate sector is gearing up for substantial expansion, with the potential to tap into a vast pool of approximately $41 billion in domestic institutional capital, according to a recent report from JLL titled ‘The Rise of Domestic Capital in Indian Real Estate.’ The sector, which has had a positive start to 2023, is experiencing a significant shift in investment dynamics, primarily driven by regulatory reforms and a growing interest from domestic investors.

Over the past decade, the Indian real estate sector has attracted around $57 billion in institutional investments. Notably, a substantial $46 billion of these investments occurred between 2015 and the first half of 2023, accounting for a staggering 81% of total investments since 2010.

Historically, private equity (PE) investors from the Americas dominated India’s real estate sector. However, their share has significantly decreased from 52% in 2022 to 26% in the first half of 2023, largely due to concerns about a looming economic recession. As foreign institutional investors adopted a more cautious approach, the first half of 2023 witnessed a surge in domestic capital, helping to fill the void left by reduced foreign investments.

The introduction of regulatory changes has been a catalyst for this transformation. Initiatives such as the Real Estate Investment Trusts (REITs) guidelines in 2014, 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 have significantly stimulated institutional investments in the Indian real estate sector since 2015.

Government-backed reforms have played a pivotal role in attracting increased participation from domestic financial institutions in the real estate industry. Over the period between 2010 and H1 2023, the sector has witnessed 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.

The advent of REITs has further attracted domestic institutional investors, such as mutual funds and insurance companies. These entities have taken on anchor investor roles, reflecting a growing interest in real estate. According to Lata Pillai, Senior Managing Director and Head of Capital Markets, India at 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.”

Real estate-focused alternative investment funds (AIFs) have emerged as a preferred choice for real estate investments among domestic institutions, ultra-high-net-worth individuals (UHNWIs), and family offices. As of December 31, 2022, AIF-II category 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 companies and mutual funds have also begun to capitalize on the opportunity to invest in real estate. As of March 31, 2023, life insurance companies had deployed approximately ₹10,867 crore, while general insurance companies had invested about ₹1,845 crore in real estate. These investments represent only a fraction of the permissible allocation, 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, including investments in REITs and real estate company shares. However, these investments are currently capped at 10% of the net asset value (NAV) of the fund.

The potential game-changer for the Indian real estate sector is the projected surge in ultra-high-net-worth individuals (UHNWIs) whose net worth exceeds $30 million. This population is expected to increase by approximately 40% in the coming years, from 13,627 individuals in 2021 to over 19,000 by 2026. This burgeoning segment is poised to make a significant contribution to private domestic capital investments within the real estate sector, further boosting its growth and potential.