Real Estate Sector Records Higher Absorption in 2023
The real estate sector in India witnessed a notable increase in absorption in the year 2023, as reported by industry experts. The total absorption reached a staggering 37.8 million square feet, marking a 21% growth compared to the previous year. This rise in absorption has been observed since 2021, with a gradual increase each passing year.
Investments Experience a Decline Amid Global Uncertainty
While the absorption numbers showed a positive trend, investments in the real estate sector faced a decline of 65% in 2023 compared to the previous year. Investors chose to adopt a cautious approach and enter a “wait-and-watch” mode due to global macroeconomic uncertainty. Despite the decline in investments, the sector managed to attract a significant amount of USD 646 million in 2023, accounting for 15% of the total institutional investment in real estate.
Emergence of 3PL Companies Boosts Absorption
Over the past decade, third-party logistics (3PL) companies have emerged as a preferred choice for businesses. These companies offer cost optimization and flexibility to clients, particularly in periods of demand uncertainty. As a result, they accounted for 44% of the total absorption in 2023, followed by engineering and manufacturing companies with an 18% share. Retail players also contributed significantly, accounting for 11% of the overall absorption.
Geographical Highlights
Mumbai proved to be the top contributor to overall absorption in 2023, capturing a 27% share. This marked an increase from the previous year, where it held a 19% share. The city witnessed a substantial 69% increase in absorption, reaching 10.2 million square feet in 2023. The heightened real estate activities in Mumbai also led to a 4% annual appreciation in rentals.
On the other hand, Kolkata experienced the highest annual decline of 23% in absorption, with just 1.6 million square feet being absorbed in 2023. The city’s share in overall absorption also decreased from 7% in 2022 to 4% in 2023. Limited availability of Grade A warehouses poses a challenge to meeting growing demands, leading to a decrease in absorption activities. The rentals in Kolkata experienced an annual decline of 5%.
Absorption in the National Capital Region (NCR) increased by 21% compared to the previous year. However, the share of NCR in the total absorption remained constant. The city’s strategic location and thriving e-commerce markets proved to be major demand drivers. The robust demand for warehouses in NCR also led to a 2% annual appreciation in rentals.
Pune emerged as a significant player, registering a substantial annual growth of 35% in absorption, reaching a total of 7 million square feet in 2023. This growth can be attributed to the presence of the Chakan MIDC trade hub, which hosts large manufacturing and logistics parks.
The southern cities of Bengaluru, Chennai, and Hyderabad, traditionally dominant forces in real estate, accounted for a collective 27% of the total absorption in 2023, after experiencing a decline from their 34% share in 2022. Overall, these cities reported a 5% decrease in absorption, reaching a total of 10.2 million square feet.
Expectations for the Future
Industry experts have projected that the real estate sector will continue to expand at a compound annual growth rate (CAGR) of 10% to 13% over the next few years. This growth is expected to be predominantly driven by the continued dominance of third-party logistics and e-commerce enterprises. Additionally, Grade A facilities are anticipated to be in high demand due to their cost-effective and efficient methods.
Shrinivas Rao, FRICS, CEO of Vestian, expressed optimism regarding the sector’s future, stating that the upcoming Union Budget 2024-25 is expected to set the tone for the next couple of years. Recent announcements regarding infrastructure development in the interim budget are believed to have a positive impact on the real estate industry. Nevertheless, 2024 may prove to be a challenging year for the Indian warehousing sector, especially in terms of attracting investments, as the trend observed in 2023 showed a downward pattern.
In conclusion, the real estate sector in India experienced a significant boost in absorption in 2023, despite facing declines in investments. The emergence of 3PL companies and the contribution of various sectors in the absorption highlighted the diversification of the market. As the industry leaders focus on efficiency and cost-effectiveness, the demand for Grade A facilities is expected to be considerable. With positive expectations for the future combined with a cautious outlook on investments, the real estate sector in India continues to evolve and adapt to meet the ever-changing demands of the market.
