The Indian real estate sector is witnessing a strong inflow of funds from the private institutional investors with investments increasing steadily from about USD 5.2 billion in 2013 to about USD 7.1 billion in 2016, driven majorly by private institutional investors. The rising deal size has also more than doubled the average deal size to USD 111 million in 2017, says a new report by KPMG titled India Real Estate – Decoding institutional investments’.

The paper was released on at the Real Estate and Infrastructure Investors’ Summit 2017 on Thursday.

Sovereign wealth funds and pension funds from Canada, Singapore, Netherlands and Qatar have become more active with over USD3 billion investments in 2017 in India’s real estate. But they have focused primarily on leased commercial assets such as office, retail and warehouses, says the paper.

Private equity funds and non-banking financial companies (NBFCs) continue to remain the largest investor in Indian real estate, accounting for about two-third of the total investments since 2016, it says, adding they are the preferred capital source for under construction projects.

Investors have also started moving towards sub-urban regions and smaller cities. Over 40 percent if the total investments since 2016 have been made in non-metro cities such as Pune, Greater Noida, Chandigarh and Amritsar. The shift could be due to mid-term saturation in large cities resulting from high property prices and fewer launches, says the paper. The breakup of investment is as follows: Retail is USD 1.6 billion; office is USD 1.4 billion; warehouse is USD 1.1 billion and residential is USD 0.6 billion.

In metro cities, investors have been focusing primarily on office and residential assets. But in non-metro cities, investors appear to have diversified their investments into different asset classes such as warehousing, retail, office and residential.

The paper points out that commercial assets – rent generating leased office, warehouse and retail assets – have been the most preferred class for investments in the last couple of years and have attracted about 80 percent of total investments between 2016 and YTD-2017, with office spaces cumulatively attracting USD 5 billion invested since 2016.

It points out that around 160-170 million sq ft of office supply are expected in the next three years, more than half of which is expected to come up in Delhi-NCR.

The foreign investors’ base having interest in Indian realty is rising, with new investors from Netherlands and Hong Kong garnering additional 9 percent and 6 percent share (2016-YTD 2017 over 2013-2015). Foreign investors comprised 80 percent of total private institutional investments made since 2016.

The paper says that the unsold inventory in the first half of 2017 stood at 8 lakh units or over three years of unsold inventory. Three cities accounted for 70 percent of inventory – MMR (2.5 lakh), Delhi-NCR (1.8 lakh) and Bengaluru (1.1 lakh).

“The year 2017 is on its course to witness highest annual investment in Indian realty in past decade, with about USD 5 billion worth of deals already closed so far. With deal size breaching billion dollar plus in past one year, Indian real estate is attracting interest and attention of global real estate community,” says Neeraj Bansal, Partner and Head, ASEAN Corridor, Building, Construction and Real Estate, KPMG in India.

“While PE funds continue to be bullish about India, there is a growing interest from foreign pension funds and sovereign wealth funds, who have more than doubled their investments in YTD2017 accounting for nearly 60 percent share (USD 3 billion) of total investments as of date. The strength of the Indian economy and favorable demographics, coupled with the introduction of several growth oriented reforms including Real Estate (Regulation and Development) Act, 2016; Real Estate Investment Trusts; Goods and Service Tax; relaxation of Foreign Direct Investment (FDI) norms etc. are aiding the real estate sector to attract higher investments,” he adds.