Future of REITs in India and its impact on the commercial real estate sector

With Blackstone and the Embassy Group forming a joint venture, to launch India’s first real estate investment trust (REIT), we examine the impact it will have on the commercial real estate landscape in India

Embassy Office Parks, a joint venture of the Embassy Group and Blackstone Group, has paved the way for the launch of the first real estate investment trust (REIT) on the Indian bourses. The development has a set a foresight of transparency, depth and liquidity for the commercial real estate marketplace in India. The increased competition and transparency that ought to arise with a dynamic REIT market, will lead to better maintenance and operation of the assets. The introduction of REITs, also promotes professionalism throughout the real estate value chain.

REITs are befitting to the investors, as they provide benefits akin to investing in a publicly-traded stock market. The investment characteristics showcase features incorporating that of the equity and bond markets, thus, providing historically competitive long-term rates of return, with low correlation with business cycles of non-REIT stocks. REITs offer an opportunity for investors to hedge against inflation, with expectations of capital investment growth and rental income distribution.

With the onset of REITs, the commercial sector could witness better capital appreciation, as compared to the residential sector. For developers, it could unlock the value of their commercial assets. They can look at REITs as a vehicle to exit, at an extremely attractive capitalisation rate, thereby, reducing their high-level debts.

See also: REITs: Eagerly awaited by the industry but buyers prefer a ‘wait and watch’ approach

REITs will change the nature of real estate investments, giving retail investors easy access to high-value properties that were previously reserved for large institutional investors. For institutional investors, REITs will provide liquidity and greater geographic and sector diversification. Since REITs and their units are publicly traded, investors may take positions in investment properties at transaction costs that are significantly lower than those of a direct investment. As listed vehicles, REITs are obliged to provide shareholders with detailed information on the values ​​of income and capital, as well as on the composition of their tenants, thus, increasing the transparency of the sector. Also, REITs will enhance asset management capabilities and reinforce organised structures in the real estate industry.

It is expected that more developed and professional REIT sector, will significantly contribute to broadening and deepening the base of real estate investors, particularly by attracting institutional and retail investors. This will contribute to the long-term development of the real estate ecosystem, which will further stimulate overall economic development. The introduction of REITs, can help mitigate the expansion-contraction cycle in real estate, by promoting a better balance between supply and demand.

(The writer is executive national director, capital markets and investment services, at Colliers International India)


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