The elections in India have been a recent source of uncertainty for the real estate market even after the final result (early counting suggests Hindu nationalist party BJP, led by Narendra Modi, will win).

Nevertheless, international investors have been attracted by India’s return prospects. Dutch pension fund asset manager APG recently agreed a joint venture with the Xander Group to invest $500m in India’s office sector, while Middle Eastern sovereign wealth funds have backed Kotak Realty’s $400m residential fund.

“Institutional money had a great opportunity to buy last year and didn’t”

Srini Sriniwasan

With strong demographics and a growing middle-class workforce, the rationale has made sense for those seeking diversification. But what happens when a thriving economy stutters and a country with a population of 1.2 billion flatlines?

Ahead of the election, India last year saw its economy slow and office vacancy rise. GDP growth, although steady at 5%, is unlikely to rise for some time, according to ratings agency Moody’s. Investment in India’s commercial real estate market was hit badly last year and fell 65% on 2012 volumes, according to advisory firm Cushman & Wakefield. The office sector suffered most, with a 77% year-on-year fall.

The slump, says C&W’s capital markets director Diwakar Rana, was due to two factors; tax regime changes announced in 2012 and investors keeping a watchful eye on the outcome of this week’s voting.

Even after the elections, the disruption caused by a new government could generate up to six months more uncertainty, Rana said, with consequences for developers seeking environmental planning approval. That could impact on some foreign investors that have made inroads by partnering local developers.

Rana said: “Political uncertainty has impacted on investment volumes – as has the lack of investment opportunities. The money, however, is there.”

While far from the market’s pre-global financial crisis peak, when money flowed into India, investment by international players is returning. Opportunities to invest, however, are less easy to find, with investors struggling to find stock.

Optimism in the private equity world knows no bounds. Cushman & Wakefield recently reported a 145% rise in investment in Indian real estate by both international and domestic private equity investors.

Coming in the first quarter of this year, the year-on-year increase suggests there is once again confidence in the country’s property market – and backs up Rana’s view that capital is coming. Blackstone, Brookfield (with local group Peninsular), JP Morgan and fund manager Red Fort Capital (on behalf of Abu Dhabi Investment Authority) have been quick to invest.

Srini Sriniwasan, CEO of private equity Kotak Realty Fund, said last year’s investment lull was a missed opportunity for some.

“India has made the headlines for the wrong reasons,” he said. “Institutional money had a great opportunity to buy last year and didn’t.”

With real estate markets in Ireland and Spain both experiencing renewed appetite from private equity and ahead of institutional investment, more longer-term money may not be far behind. One of the drawbacks of investing India has been the lack of liquidity. However, a REIT sector, would, Sriniwasan added, help make Indian commercial real estate more tradeable and provide more exit strategies for current owners, as well as increase its appeal to new entrants.

The idea has been considered by the country’s governing bodies, which have so far favoured the creation – rather than trading of – real estate. Most asset classes – with the exception of IT parks – are bound by restrictions on selling. Retail property has been one notable victim of the restriction.

APG – having first invested in India in 2008 – has not been put off by any macro concerns. The Dutch investor recently agreed a joint venture with the Xander Group to invest $500m in the country’s office sector two years after it entered a residential investment deal with the property development arm of India’s Godrej Group.

Having also invested in the country’s hotel sector via a joint venture with Lemon Tree hotels, the recent decision to partner Indian specialist Xander – which has typically worked with private equity funds – might give APG greater inroads into the country’s office sector.

DTZ forecasts that 29m sqft of office space will be sought by occupiers in India’s major cities, with space absorption likely to rise 7% this year. In its March report on India office demand and trends, the agent predicts that rents will remain stable in most of India’s main office markets in the first half of 2014, with rises in the second half of this year.

APG’s Sachin Doshi, head of Asia-Pacific non-listed real estate, said that, despite India’s recent slowdown, its top six cities are enjoying the largest net absorption of office space in the Asia-Pacific region.

Confident it will benefit from improvements in the Indian economy, Canada Pension Plan Investment Board (CPPIB) is also investing in the country’s office sector.

Late last year, it agreed a joint venture with Mumbai’s Shapoorji Pallonji Group to acquire office properties. CPPIB put an initial $200m commitment to the partnership, in which it has an 80% stake. CPPIB has also partnered India’s Piramal Enterprises in a residential development debt joint venture through its CPPIB Credit Investments subsidiary. The two companies will lend on residential schemes in Mumbai, Delhi NCR, Bangalore, Pune and Chennai.

Denmark’s Sparinvest, backed by Danish pension funds PKA, Lærernes Pension and PenSam among others, has also invested in Indian real estate via its 2011-vintage real estate fund-of-funds vehicle Sparinvest Property Fund II. The global value-added fund, which targets net 10-13% returns, has invested across all property sectors.

As is the case across the globe, cities continue to appeal to all investor types. With India’s financial and IT sectors as key tenants, the respective office (and consequentially residential) markets of Mumbai and Bangalore should continue to appeal.

From a state of “paralysis”, Srinwasan hopes a stable political scenario will pacify future global investors.

“There seems to be an overwhelming sense of optimism for a stable government and we hope we are heading for better times,” he said.