Having observed India’s real estate over 2 decades through various lenses as a lender, developer and fund manager, my view is that India is now primed for the next wave of alternative investment opportunities.
Having observed India’s real estate over 2 decades through various lenses as a lender, developer and fund manager, my view is that India is now primed for the next wave of alternative investment opportunities.
India’s real estate investment opportunities have traditionally been high-cost private credit to developers for project acquisition and execution. This story is rife with several challenges from approval/policy timelines, cost and time escalations and ability/willingness of the borrower to honour commitments. This may play out to plan on one-off projects or relationship-based lending but is bound to fail more often than not, on a long-term portfolio-based approach. Consequently, we have seen large real estate funds fail, in some cases quite spectacularly, even those backed by reputed sponsors. Lack of control/asset ownership, single point of exit alongside the other challenges has been a recipe for disaster.
India’s transformation over the last decade can possibly be categorised into three parts: a) providing the essentials for millions viz. toilets, cooking gas, piped clean water ; b) Physical infrastructure like roads, ports, highways, airports, inland waterways and renewable energy assets and c) Laying out India’s digital blueprint viz. Aadhar linkages, Direct Benefit Transfer (DBT), land records digitisation and going forward India’s vision in the AI juggernaut.
The real estate sector’s formalisation accelerated over the last decade with the onset of RERA, GST and IBC. The coming decades will see a deepening in the capital stack for various real assets. What we also see is a financialization of India’s real estate alternatives with REITs and InVITs becoming mainstream, albeit largely in commercial office.
REITs typically provide stable annuity yield, with commercial office being the darling of yield-chasing investors. But like in most assets where investor demand outstrips mature REIT-ready supply, yields are in lower single digits and upside is limited. I believe the maturity in the REIT ecosystem is now poised to have a ‘butterfly’ effect on other alternative asset classes, widening the choice for discerning investors. Many of these asset classes are at an inflexion point in their growth trajectory, or simply put, where commercial office opportunities were a couple of decades ago.
Arca invests in creating and maturing curated portfolios of alternative real assets with the following fundamental characteristics:
- Wide demand-supply gap which will possibly take at least a decade to close even meaningfully. Remember such gaps exist due to multi-decadal historical challenges of polity and policy but new Grade-A supply at scale take time to come online.
- Most industry metrics are not even close to Emerging Market (EM) peers, and incomparable to developed market dynamics.
- Majority ownership and control of the asset if not 100% ownership.
- Target double digit yields with strong growth characteristics.
- Conservative underwriting especially on revenue growth and exit valuations.
- Reputed counterparty for asset operations.
Setting up these platforms always involves solving for Land/Approvals/Construction, Capital and Operations. Arca always believes in solving for the Operator first, then the development partner (if greenfield) with a belief that Capital will follow based on identified pool of assets.
After careful study and legwork, Arca has zeroed in on four evergreen use cases - healthcare, managed living, education and digital infrastructure. These are end-user driven assets bearing all the markers of Arca’s investment philosophy with some even having the added advantage of being anti-cyclical.
Among these, Arca has curated two platforms – ‘Eraya’ for managed living assets and ‘Yantra’ for digital assets.
Eraya – the case for managed living assets
India’s living/stay has been dominated by traditional residential homes and apartments for long-term living or (sub-optimal) investment. But there is a crying need for ‘plug-n-play’ fully serviced residential assets for a need-based use basis. This could straddle assets as varied as Hotels, Serviced apartments, Student-housing, Co-living and even Worker Housing.
Under Eraya, Arca has launched their first platform for hospitality (hotels) last quarter after close to two years of research on the opportunity.
Why Hospitality and why now?
India has roughly about 1.6 million Grade-A hotel rooms which, as it’s famously said – lower than Vegas has on the strip. But more importantly, on most hospitality metrics, whether on hotel rooms or tourism footfall or even tourism spend, we’re way below (in some cases one-third) of our emerging market peers like Indonesia and Vietnam. India is blessed with strong diversity in climate, geography, people, culture, food and traditions. But traditional challenges in the development of this sector lay in physical infrastructure and connectivity, security, technology and micro-social infrastructure as also marketing. Many of these challenges have/are being overcome e.g. 60% jump in national highways to over 146,000 km, operational airports more than doubling to 160, near 100% railway track electrification and upgradation of coaches, amenities and safety, upgradation of inland waterways and river linkages as also metro connectivity now exceeding 1,000 km across 26 cities. These are significant tailwinds for the tourism and hospitality industry, which are now seeing strong growth expected to be sustained over the coming years.
India’s hotel sector closed 2024 with nationwide occupancies of roughly 63–65%, almost back to pre‑pandemic levels, while average room rates were more than 27-29% higher than pre-covid benchmarks, pushing RevPAR to multi‑year highs. Branded hotels recorded 68% occupancy in FY 2024-25, with ADR at ₹8,500 and RevPAR at ₹5,700, reflecting 4.7% ADR growth and 5.7% RevPAR increase year-over-year; Tier II markets showed ADR of ₹7,000 and RevPAR of ₹4,700, while Q1 2025 saw a further 16.3% YoY RevPAR surge. This has been primarily driven by domestic/weekend tourism and sharp increase in MICE activity. Surging domestic travel on the back of far-improved connectivity is now fuelling the twin engines of growth as also seasonality reduction. Foreign tourism growth -for now benign due to geo-political and war risks, is further expected to boost these numbers once these risks diminish. Demand is expected to grow, particularly in emerging Tier II/III, religious and industrial markets for spiritual, wellness and civilisational tourism where demand far outpaces supply - annual demand expected to grow at 13% CAGR while supply addition expected to grow at 10% CAGR, further widening the demand-supply gap for the immediate future. All of these point to a long growth runway for the sector underpinned by domestic consumption and favourable tourism policies, thereby providing an excellent opportunity for the early investor.
Yantra – if data is the new oil, digital infra are the new oil rigs
On the digital side, India’s data centre market is in the midst of a capacity build out aligned with rapid cloud, AI and digital adoption. Colocation capacity across the top cities reached about 977 MW in 2023, with 258 MW added in that year alone - a capacity increase of over 100% year on year. Forward pipelines indicate under construction additions of roughly 1.03 GW plus planned expansions of another 1.29 GW, taking projected capacity to about 3.29 GW by 2028, while market value is estimated to grow from about ₹37,000 Crore in 2023 to roughly ₹1 Trillion by 2032 at a CAGR close to 11%. This is the infrastructure backbone for hyperscalers, cloud, AI and enterprise digitisation - a long duration theme with clear visibility.
The healthcare delivery and hospital services market, which was at around ₹16 Trillion in 2024, is projected to grow strongly through 2030, driven by rising healthcare spending, expanding insurance coverage and increased penetration in Tier II and Tier III cities. Separate estimates suggest the broader healthcare sector could reach roughly ₹28.8 Trillion by 2028, underscoring the depth and durability of demand for institutional healthcare infrastructure.
Education too has been a long cycle theme: rising enrolment ratios, steady growth in private institutions and an expanding student base in specialised and professional courses continue to support demand for high quality, campus like education infrastructure and student-housing. Within the broader healthcare and services landscape, private education and allied training have consistently outpaced GDP growth over the last decade, particularly in urbanising and emerging corridor.
Put together, these investment opportunities provide a multi-decadal investment opportunity for long-term investors for strong risk-adjusted yields and stable portfolio exits linked to potential public market listing valuations.
As India changes, so will its real asset opportunities and by extension so will its investors. At Arca, we hope to be at the forefront of this change and continue to spot and curate such opportunities hiding in plain sight.