June 27, 2023: About two-third of the real estate investment trust (Reit) worthy Grade-A office stock in the country falls in secondary business districts (SBDs) of the top six cities in India, shows a report by property brokerage firm Colliers.
Among these SBDs, Hyderabad’s SBD holds the highest quantum of Reit-worthy stock with 28% share, followed by Bangalore at 24%. Over 60% of the Grade-A stock within SBDs is Reit-worthy. At the same time, about half of the total stock in peripheral business districts (PBDs) across the top six cities is Reit-worthy, the report says.
“Understandably, the central business districts (CBDs) have a relatively lower share of Reit-able stock, at 10%, due to limited new supply and presence of relatively older buildings,” says the report titled REITs- gaining larger ground in Indian Real Estate.
Reits have gained significant market as a promising alternate real estate platform, and hold a huge potential to attract investments into the real estate sector, it adds.
At present, the three listed office Reits cumulatively hold approximately 74.4 million square foot (msf) of stock, representing around 11% of the total existing Grade-A office stock.
“The underlying office sector has demonstrated resilience, particularly in the top six cities, with strong occupancy levels, despite looming externalities affecting demand. Office vacancy levels remained stable in the first quarter of 2023 (Q12023) at 16.4%, pointing to a fundamentally strong commercial office market. The outlook for the office sector remains optimistic, led by technology & flex space, with the market likely to bounce back in the latter part of the year,” says the report.
“Reits in India are still at their early stages compared to other regional markets. Strikingly, the market capitalisation of Indian Reits is less than 10% compared to the US, Singapore and other countries in the Asia-Pacific region. Considering the size of the Indian office market there exists a huge potential for more number Reits and expansion of current ones. The overall returns on listed Reits in India, including dividend yield, have been a major factor in the success of Reits in the country. The regulatory structure has also evolved and fallen in line with global best practices. In years to come, we are likely to see Reits expand to other asset classes such as industrial, data centres, hospitality, healthcare and education,” says Piyush Gupta, managing director, capital markets and investment services, Colliers India.
Untapped Reits potential at 57%, 380 msf of Grade-A office stock on the platter
About 380 msf of the existing Grade-A office space qualifies to be listed as Reits. Among the top six cities, Bangalore leads with the largest share stock at 25%, followed by Hyderabad at 19%. An additional 41 msf of under-construction office stock, which is expected to enter the office market by the end of 2023, holds the potential to be Reit-ed.
The three office Reits in India have been able to establish a strong platform to evince among global investors’ interest to commit funds in development-based assets. REITs are evolving and have paved the way for other asset classes as well. India’s first Retail REIT was listed on stock exchange in May 2023, expanding the investible cosmos for investors.
Market cap of Reits in India is less than 10% compared to the top global markets
India is still a relatively smaller market compared to its counterparts in the APAC, Europe and America. India’s Reit market capitalisation accounts for less than 10% of the market capitalisation of other countries like the US and Singapore.
“However, India’s Reit market is poised for higher growth and has significant potential. With an existing Reits penetration rate of 11%, India has significant room to increase its REITable share up to 68%, aligning with other APAC countries like Singapore and Japan which have more than 50% of their office portfolio under Reits. A larger share of Reits in office portfolio can lead to the corporatization of the office sector and enhance credibility for investors led by the stringent regulatory requirements for Reits,” says the report.
After the maiden retail Reits, the market is ripe to see the listing of Reits in industrial & warehousing sector while it continues to gain larger ground in existing asset classes.
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