Real estate investment falls as housing costs rise: Private equity investment in Indian real estate fell 31% to $1.66 billion in the first nine months of 2026, according to the latest Knight Frank assessment. Foreign investors sharply reduced their exposure, while domestic institutions accounted for 85% of investment, against 25% a year earlier. The change in investor composition comes at a time when India’s office market continues to attract tenants and expensive homes account for a growing share of residential sales. These trends suggest that the sector retains considerable strength, although investment is becoming more selective. They also raise a question about the sustainability of property valuations, particularly in a housing market where the supply of homes affordable to middle- and lower-income households is increasingly inadequate.
The commercial property market presents a mixed picture. Knight Frank’s latest data show that office assets attracted $1.18 billion in private equity during January-September 2026, making them the largest recipient of investment despite a 19% annual decline. Completed office properties accounted for 78% of investment in the segment, compared with 49% in the corresponding period of 2025. Investors are favouring properties with established rental income over projects whose returns depend on construction and future leasing.
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India’s office market has genuine advantages. The expansion of global capability centres (GCCs), technology companies and multinational businesses has supported demand for high-quality space. According to Knight Frank’s first-quarter 2026 assessment, office vacancy across eight major markets declined from 17.2% in 2021 to 13.9%, while rents continued to rise. Office leasing reached 29.9 million square feet during the quarter, an increase of 6% over the previous year. These provide more tangible grounds for valuations than expectations of price appreciation alone.
Commercial property nevertheless carries risks. Office demand depends on corporate expansion, employment trends and the changing economics of technology and business services. An asset that appears attractive at today’s occupancy and rental levels can disappoint if tenants reduce their space requirements or new supply outpaces demand. Investors must distinguish between current rental income and the durability of that income.
The investment data also reveal a shift towards smaller transactions. Although the number of private equity deals rose from 24 to 31 during January-September 2026, the average disclosed deal size fell 47% to $53 million. Total investment declined from $2.41 billion a year earlier. Investors remain active but are committing smaller amounts. More transactions do not necessarily indicate greater confidence.
Premium housing grows as affordability weakens
India’s larger real estate challenge is the inadequate supply of homes that ordinary households can afford. A buoyant market for premium apartments can coexist with considerable unmet housing demand.
Knight Frank’s residential assessment for the first quarter of 2026 reported that home sales across the top eight cities fell 4% year-on-year to 84,827 units. Sales recovered sufficiently in the following quarter to produce a marginal annual increase for the first half, but the composition of demand continued to change. Homes priced above ₹1 crore accounted for 54% of sales in the first half of 2026, compared with 49% a year earlier. Homes costing less than ₹50 lakh accounted for only 19% of sales.
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The growing share of expensive homes reflects demand from affluent households, but it also reflects rising prices that have pushed properties into higher price brackets. The sales figures alone cannot establish how much of the change comes from either factor. What is clear is that developers have stronger incentives to build premium housing where margins are higher, while the supply of lower-priced homes remains constrained.
India needs substantial investment in housing, yet developer economics have not translated into adequate supply for middle- and lower-income households. High land costs, construction expenses and the difficulty of delivering affordable projects in well-connected locations have encouraged builders to concentrate on more expensive developments. More housing units may be entering the market without a corresponding improvement in access to housing for those who need it most.
There is also a distinction between demand for housing and the ability to purchase it. A family may need a home close to employment but lack the savings or income required for a mortgage. Developers respond to buyers who can finance a purchase rather than to the broader population requiring accommodation. This leaves a gap that rising property sales cannot resolve.
Stalled projects expose weaknesses in housing delivery
India’s legacy of stalled projects shows why housing supply cannot be measured simply by counting launches. The Economic Survey 2023-24, citing an Indian Banks’ Association estimate, reported approximately 4.1 lakh stressed dwelling units involving ₹4.1 lakh crore. The government established the Special Window for Affordable and Mid-Income Housing (SWAMIH) investment fund in 2019 to provide financing for stressed projects and help complete homes for which buyers had already paid.
The Real Estate (Regulation and Development) Act, 2016, was another attempt to improve transparency and accountability. Its effectiveness depends heavily on state regulatory authorities enforcing registration requirements, resolving complaints and ensuring that developers meet their obligations. Buyers who have paid for unfinished apartments gain little from fresh construction elsewhere.
These problems have implications for investment as well. Completion risk affects developers, lenders and homebuyers, while delays can undermine confidence in an entire local market. Financing viable stalled projects and improving regulatory enforcement may deliver greater economic benefits than encouraging additional launches where existing commitments remain unfulfilled.
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Domestic investors replace retreating foreign capital
Foreign investors have sharply reduced their exposure to Indian real estate, although this need not imply poor long-term prospects for the sector. Knight Frank attributes their reduced participation partly to better return opportunities overseas, rupee depreciation and a narrowing differential between Indian and US bond yields.
Foreign investment fell from approximately $1.81 billion during January-September 2025 to $243 million in the corresponding period of 2026. Domestic investment, meanwhile, increased from $603 million to $1.42 billion. This reversal has changed the sources of capital available to developers and property owners.
Currency movements can materially reduce returns for foreign investors when rupee proceeds are converted into dollars. Higher yields available in other markets also change the relative attraction of Indian assets. Domestic investors, who generally do not face the same currency exposure on rupee investments, may therefore be willing to invest when overseas institutions become cautious.
A decline in foreign investment does not mean property prices must fall. Similarly, a revival in overseas investment would not establish that current valuations are justified. The more useful questions concern the source of domestic capital, its cost and the returns that properties can reasonably generate.
A larger domestic investor presence may reduce dependence on volatile international capital flows. But the quality of investment decisions will determine whether that change strengthens the market. Property valuations must ultimately be supported by genuine demand, sustainable rental income and buyers’ ability to pay.
Real estate investment: Housing policy must address incomes and access
Policymakers need to pay greater attention to household incomes, housing affordability, rental markets, infrastructure connectivity and reliable project delivery. Rising property prices can be justified where incomes, rents and economic activity support them. In locations where prices increase much faster than household earnings, however, an expanding market can progressively exclude potential buyers.
Improving the supply of well-located affordable housing will require attention to land availability, planning rules and infrastructure. Housing built far from employment centres may be cheaper to purchase but costly to occupy when commuting expenses and lost working hours are considered. Stronger rental markets could also improve access for households unable or unwilling to buy.
Public intervention has a role where private development cannot produce housing at prices lower-income households can afford. The challenge is to make such intervention financially sustainable while ensuring that subsidies, infrastructure investment and planning approvals deliver homes in viable locations. As Policy Circle has previously examined, a public-land strategy could help expand affordable urban housing.
India’s real estate market has credible long-term prospects, supported by urbanisation, household formation and business expansion. But these factors cannot justify every project or asking price. A market that attracts investment while excluding an increasing share of potential homebuyers has reason to examine the foundations of its growth. Property prices will remain defensible only where they bear a reasonable relationship to the incomes and economic activity that sustain them.