India's real estate sees shift to smaller deals and local capital amid PE investment drop

India’s real estate sector saw a significant shift in private equity (PE) investment patterns in the first nine months of 2026, with domestic investors emerging as the main source of capital, even as overall investment declined. According to Knight Frank India’s Q3 2026 Capital Markets report, PE investment fell 31 per cent year on year (y-o-y) to $1.66 billion during January-September 2026, compared with $2.41 billion in the corresponding period of the previous year. However, the number of transactions rose from 24 to 31, suggesting investors remain active but are committing smaller amounts and adopting a more selective approach.

The average disclosed deal size declined 47 per cent to $53 million, reflecting the absence of large-ticket transactions. More significantly, domestic investors accounted for 85 per cent of total investment, compared with 25 per cent a year earlier, reversing the traditional dominance of foreign capital.

“The changing composition of real estate investment is as important as the headline numbers,” affirms Shishir Baijal, international partner, CMD, Knight Frank India. “Domestic capital is playing a much larger role now, contributing 85 per cent of total PE investments in real estate, while investors are becoming more deliberate about the size, structure and risk of each commitment. This is not simply a question of capital becoming available or unavailable; it is about where investors see returns that justify the risks. Completed office assets and structured residential credit reflect different approaches to that calculation. As global return expectations and currency conditions evolve, India’s ability to attract capital will depend on the quality of opportunities, transparency and investor confidence in long-term fundamentals.”

On a comparable nine-month basis, PE investment in 2026 was at its lowest level in six years. Unlike earlier periods, when a strong quarter lifted overall investment, capital deployment in 2026 was relatively evenly distributed across the three quarters. The absence of large transactions was the primary reason for the decline.

Office remained the largest recipient of PE capital, attracting $1.18 billion during the nine-month period in 2026, accounting for 71 per cent of total investment. However, investment declined 19 per cent from $1.46 billion in the corresponding period last year.

A significant change was the growing preference for completed, income-generating properties. Ready office assets accounted for 78 per cent of office investment, compared with 49 per cent a year earlier. Further, 88 per cent of office capital was deployed through the equity route.

Investors’ focus

This preference reflects investors’ focus on predictable rental income, established occupancy and lower development risk. Completed properties offer better visibility on tenant quality, leasing arrangements and cash flows than under-construction developments.

Despite retaining its position as the largest investment segment, office investment witnessed a quarterly slowdown. It stood at $180 million in Q3 2026, compared with $710 million in Q3 2025 – a decline of 74 per cent.

Residential real estate attracted $320 million in PE investment during the nine-month period in 2026, declining 33 per cent from $480 million in the year-ago period. Unlike office, residential investment remained predominantly debt-led, with debt and structured credit accounting for 97 per cent of capital deployed.

About 83 per cent of residential investment went into under-construction projects, highlighting the role of alternative financing in supporting developers’ construction and working capital requirements. Such arrangements also allow investors to secure defined returns without taking conventional equity exposure.

Residential investment in Q3 2026 stood at about $200 million, compared with $190 million in Q3 2025. The National Capital Region (NCR) accounted for 63 per cent of residential investment during the nine months.

The growing importance of structured credit is linked to the returns available through developer financing. Real estate credit funds typically target annual returns of 15-18 per cent on developer lending, about 900 basis points above the yield on 10-year government securities. This premium has supported domestic capital deployment, particularly in residential real estate.

Warehousing attracted $160 million during the first nine months of 2026, compared with $100 million in the corresponding period last year. The entire investment came through a single transaction involving a ready asset in Q3.

Investor interest in operational logistics properties is supported by the expansion of e-commerce, third-party logistics, manufacturing and supply-chain networks. However, the limited number of transactions indicates selective capital deployment, with location, tenant commitments and income visibility influencing decisions. Retail recorded no PE investment during the nine months, compared with about $370 million in the corresponding nine-month period of 2025, reflecting subdued institutional investment activity.

Domestic capital

The most significant development has been the growing influence of domestic capital. Domestic investors contributed approximately $1.42 billion during the nine-month 2026, accounting for 85 per cent of total PE investment. They funded 94 per cent of residential investment and 81 per cent of office investment, besides the sole warehousing transaction. Foreign investors contributed about $240 million, accounting for the remaining 15 per cent.

The domestic share increased from 25 per cent in the nine-month period in 2025 to 85 per cent in the nine-month period in 2026, with investment rising from $603 million to $1.42 billion. Knight Frank’s analysis indicates that domestic investors’ share of real estate PE investment increased from 11 per cent during 2011-20 to 32 per cent over the subsequent six-year period.

The expansion of Alternative Investment Funds (AIFs), domestic private equity platforms and structured investment vehicles has created additional channels for Indian capital to participate in real estate. These platforms enable investors to access opportunities across asset classes while providing developers with alternative institutional funding.

The changing investor composition also reflects global economic conditions. Higher return thresholds in overseas markets, coupled with rupee depreciation, have weighed on foreign investment. Currency depreciation can reduce dollar-denominated returns when investments are converted into foreign currencies, even when Indian assets generate satisfactory rupee returns.

Domestic investors, by contrast, are not exposed to the same currency risk and evaluate real estate opportunities against alternative domestic investments. Attractive returns through structured property financing have further strengthened their participation.

The geographical distribution of investment also changed significantly. NCR emerged as the largest recipient, attracting $568 million, or 34 per cent of total investment in the nine-month 2026. Pune followed with $356 million (21 per cent), Chennai with $319 million (19 per cent) and Mumbai with $276 million (17 per cent).

Bengaluru attracted $137 million, accounting for 8 per cent of investment, compared with $707 million in the corresponding period last year. Mumbai’s share declined from 24 per cent to 17 per cent, while Kolkata, which attracted $374 million in 9M 2025, recorded no investment. Hyderabad received a marginal $4 million.

NCR’s leading position was supported by its substantial share of residential investment. Pune and Chennai also attracted meaningful capital, indicating that investors are looking beyond the traditional concentration in Mumbai and Bengaluru. However, individual large-ticket transactions and asset availability can significantly influence city-wise investment shares.

Going forward, PE deployment in Indian real estate is likely to remain sensitive to asset quality, risk allocation, financing structures and currency-adjusted returns. Completed office properties with established tenants and predictable rental income are likely to remain attractive, while residential developers may continue relying on structured credit.

Growing domestic institutional participation provides an important source of funding as foreign investors adopt a more selective approach. Greater stability in global interest-rate expectations and improved currency visibility could eventually encourage renewed cross-border investment.

The decline in PE investment does not necessarily signal a loss of confidence in Indian real estate. Rather, it reflects a transition in capital sources and investment structures. Transparent opportunities, credible development prospects and sustainable risk-adjusted returns will determine how effectively the sector attracts capital in its next phase of growth. Greater institutional participation, stronger governance standards and a wider pool of investment-ready assets could further deepen the market. As domestic platforms expand and global financial conditions stabilise, India could see a gradual revival in cross-border investments, complementing the growing strength of domestic capital.

Another factor likely to influence investment flows is the availability of institutional-grade assets across emerging markets.