PE investors take a cautious approach to real estate

Private equity investments in India’s real estate moderated in 2025 but sustained investor engagement. According to Knight Frank India’s latest report: Trends in private equity investments in India: H2 2025, private equity investments in Indian real estate declined by 29 per cent during the year, reflecting a broader global reassessment of risk, returns and execution. Office assets emerged as the clear anchor for private equity investments, attracting 58 per cent of total inflows, at about $2 billion, in 2025. Office investment volumes remained broadly in line with the three-year average, underscoring continued investor conviction.

Knight Frank India’s Capital Markets report adopts a focused private equity lens, tracking only capital deployed by PE investors across core real estate asset classes. Platform-level investments are included solely for warehousing, while transactions in other segments are recorded only once capital is deployed. The analysis does not include REITs, InvITs, hospitality and data centre transactions, ensuring a clear, comparable view of private equity activity across the office, residential, retail and warehousing sectors.

The slowdown in private equity investments in Indian real estate during 2025 reflects a sharp recalibration across three interconnected dimensions – the effective cost of capital, exit visibility and valuation alignment. While macro-economic conditions (GDP growth, interest rate and inflation) improved, these three variables failed to realign quickly enough to support sustained capital deployment.

Private equity investors remained cautious in 2025. Slower valuation adjustment constrained deal execution, even as operating performance in office and retail remained robust. Capital, therefore, shifted towards downside-protected, income-focused structures rather than large-scale deployment, says the report.

“Knight Frank’s investment forecasting model points to a more supportive environment over the medium term,” says Shishir Baijal, international partner & CMD, Knight Frank India. “Based on assumptions around government capital expenditure, currency movement, inflation, interest rates and incremental office supply, private equity investments in Indian real estate are projected to rise by 28 per cent year on year to approximately $4.4 billion in 2026. This recovery is expected to be measured, driven by selective growth, rather than a broad-based return of risk capital.”

Office gets lion’s share

Office assets continued to account for the largest share of private equity investments during the year, reflecting their scale, institutional depth and income stability. ‘Residential’ emerged as the second-largest segment, driven primarily by structured capital deployments. Residential real estate drew 17 per cent of the total private equity investments during the year. But the nature of capital deployment shifted meaningfully, with investors increasingly favouring credit-led instruments over pure equity exposure, prioritising contracted cash flows and downside protection, while retaining participation in the sector’s long-term growth. Equity investments were largely confined to de-risked projects with clear execution visibility.

Occupier demand remained robust in the warehousing sector. The sector remained the third largest recipient of private equity investments in 2025, recording 15 per cent of the total PE share. This demand was supported by e-commerce expansion, supply-chain formalisation and manufacturing growth. The moderation in investment volumes was largely supply-driven, reflecting limited availability of stabilised, institutionally owned assets and a more conservative underwriting approach to build-to-core strategies amid higher financing costs.

Retail real estate saw limited investment activity in 2025, marked by a single large transaction after nearly two years of muted private equity participation. As a result, the segment accounted for just 11 per cent of total private equity investments during the year. Capital deployment resumed only for assets that met strict criteria on scale, operating performance, and exit visibility. Beyond these assets, investor interest remained selective, with secondary malls and repositioning-led opportunities seeing limited traction.

Office and logistics-led strategies are likely to remain the primary beneficiaries of renewed inflows, while residential and retail investments are expected to continue focusing on structured and project-specific opportunities. As interest rates stabilise and underwriting confidence improves, capital deployment should gather momentum in 2026 onwards, led by assets offering clear execution pathways and durable cash flows.