Private equity investments in Indian real estate declined 29% to $3.46 billion, driven by reduced funding in housing and warehousing sectors, according to Knight Frank India's latest analysis.

The real estate consultant attributed this downturn to investor caution and reduced capital inflows, particularly in housing and warehousing projects. The total investment fell from $4.90 billion in the previous year.

Performance Across Asset Classes

The investment landscape showed mixed results across different real estate segments. Office assets emerged as the primary beneficiary, attracting the largest share of private equity funding during the year.

Office assets commanded 58% of the total private equity inflows, demonstrating continued investor confidence in commercial real estate. Retail real estate also showed positive momentum, garnering $374 million in investments compared to no inflows in the previous year.

Sectoral Challenges

The housing segment faced significant headwinds, with investments dropping from $1.18 billion to $576 million. Warehousing parks experienced an even steeper decline, with funding plummeting from $1.88 billion to $510 million during the same period.

Knight Frank noted that the slowdown reflects "a sharp recalibration across three interconnected dimensions: the effective cost of capital, exit visibility, and valuation alignment." Despite improvements in macroeconomic conditions including GDP growth, interest rates, and inflation, these factors failed to realign quickly enough to support sustained capital deployment.

Market Outlook

Looking ahead, Knight Frank Chairman and Managing Director Shishir Baijal projected a potential recovery in the following year, with private equity investments expected to rise 28% to $4.40 billion. However, he emphasized that "this recovery is expected to be measured, driven by selective growth rather than a broad-based return of risk capital."

The analysis provides context by noting that private equity investments in Indian real estate reached a record high of $6.73 billion during the 2018 calendar year. The current investment levels, while lower than recent years, indicate ongoing institutional interest in India's real estate market despite prevailing challenges.

Note: The analysis excludes REITs, InvITs, hospitality, and data centre transactions.

Lower home loan interest rates have significantly improved housing affordability across India's major cities, offering relief to homebuyers and supporting sustained residential demand, according to Knight Frank India's latest Affordability Index. The comprehensive analysis reveals that affordability conditions have strengthened substantially following recent monetary policy changes and stable economic conditions.

Ahmedabad Leads Affordability Rankings

The report highlights that affordability improved in seven of the top eight cities, with Ahmedabad emerging as the clear leader in housing affordability. The city recorded the lowest EMI-to-income ratio of 18% among major markets, making it the most accessible destination for homebuyers.

A lower EMI-to-income ratio indicates that households spend a smaller proportion of their income on home loan EMIs, making housing more affordable for potential buyers.

Mumbai Achieves Historic Affordability Milestone

A key milestone was recorded in Mumbai, where housing affordability improved meaningfully, with the EMI-to-income ratio declining to 47%. This marks the first time in the city's history that affordability has fallen below the critical 50% threshold, a level beyond which banks typically become cautious in underwriting home loans. Knight Frank India noted that this signals a more sustainable affordability environment for India's most expensive residential market.

Interest Rate Cycle Drives Market Dynamics

The improvement in affordability comes after a volatile interest-rate cycle over the past few years. While affordability strengthened between 2010 and 2021 and further improved during the pandemic due to ultra-low interest rates, it temporarily weakened in 2022 following a sharp 250 basis point hike in the RBI's repo rate to combat inflation. Stability in rates from early 2023, followed by recent repo rate cuts, has once again tilted conditions in favor of homebuyers.

Mixed Performance Across Other Markets

Among other cities, Bengaluru and Hyderabad saw affordability levels remain stable, as improvements in income and demand were matched by a rise in housing prices. NCR was the only market to see a marginal deterioration in affordability, driven by a premium-led rise in weighted average prices. Despite this, affordability levels in NCR remain well within comfortable limits and significantly better than the stress threshold of 50%.

Market Outlook and Expert Commentary

Knight Frank India observed that this supportive rate environment has helped residential sales remain close to the post-pandemic peak, with momentum expected to carry forward, supported by resilient economic growth and easing inflation. Shishir Baijal, International Partner, Chairman and Managing Director, Knight Frank India, noted that income growth has outpaced price increases in recent years, and when combined with declining interest rates, has strengthened home affordability across markets. With the RBI projecting strong GDP growth and a benign interest-rate outlook, affordability levels are expected to remain supportive of housing demand in the near future as well.