Fresh capital will need to have 16-18% Internal Rate of Return expectations from Greenfield projects, says Rishabh Vora, Co-Founder & CEO, SILA Solutions

Mumbai-based SILA Solutions, a Real Estate platform with operations in over 75 cities, providing facility management, project management/advisory services and recently ventured in Real Estate development, has estimated that over $100 billion will be required to fund the Indian Real Estate sector growth over the next decade.

The company, which has ventured into Real Estate development in 2019, also reiterated that fresh capital into the sector will need to have expectations in the order of 16%-18% Internal Rate of Return [IRR] – particularly from Greenfield deals which don’t have legacy issues and funded in collaboration with the NBFCs. The analysis reaffirmed that capital flows will move from commercial real estate to residential segment across India during 2021/2022.

According to a research by SILA Solutions, the Commercial, Retail and Hospitality real estate will have a tough 2021, with large tenants not expected to be back at work until mid-year. However, the Residential and the Industrial segment will help the industry gain some momentum during the year.

“In a sector which was already starved of capital post the NBFC crisis, the fear during the initial phase of COVID pandemic and the subsequent lockdown was that capital flows would slow down. However, one cannot ignore high growth markets like India as it offers a huge potential for good capital growth in the next few years,” says Sahil Vora, Founder of SILA Solutions.

Sahil Vora added that with the unprecedented global liquidity, there is capital sitting on the sidelines. “We did see some large platform deals being announced post-pandemic in commercial space – which has attracted the bulk of global capital into the country’s real estate. We believe, that this capital will increasingly focus on residential from commercial in 2021, 2022.” says Sahil. “Construction finance is also a significant opportunity that we believe will be tapped in the next 3-5 years” added Sahil Vora.

In his comments, Rishabh Vora, Co-Founder & CEO, SILA Solutions, said: “Commercial will be hit hard in 2021 as large asset owners with 90%+ occupancy will be forced to offer up to 15% discounts to quality tenants on rents in some markets. This pain is exacerbated for those asset owners with lower occupancy levels and weaker balance sheets. Due to supply/demand metrics, markets like Mumbai and Bangalore will be more resilient than Pune, Chennai, NCR and Hyderabad in 2021.”

Rishabh Vora added: “Moreover, large tenants are looking at taking advantage of the current lull in the market to lock-in prime Grade A space at a good price with a RCD (Rent Commencement Date) of calendar year 2022. Asset owners, currently on the back foot, are entertaining these discussions in order to ensure that their portfolios are back on track from calendar year 2022.”

The good news is that post-consolidation and big-ticket deals over the last couple of years, most of the large asset owners in the commercial space have a low cost of capital, strong balance sheets and will tide over until demand picks up, the research revealed.

In comparison, the residential market looks optimistic across most of Indian cities. “The pricing is rational across most micro markets, affordability is high, and mortgage rates are at a 10-year low. The spread between rental yields and mortgage rates is sub 5% in most markets, something we have not seen in the recent past in India, which makes it a bullish proposition,” said Sahil Vora.

He added that transaction costs in many markets are lower due to the temporary government reduction in stamp duty and the festive season has been strong across most cities, with Mumbai registering better numbers compared to those in the past decade.

The government is also expected to provide a fillip to the real estate sector valuing its importance for the overall economy, and the ancillary benefits a strong real estate market provides to the other sectors, the industry study revealed.