India’s present REIT potential: 294 million sq ft of office space

With the listing of India’s first REIT, we look at the potential that this investment avenue offers and the factors that will determine its future success

The Indian commercial real estate market is estimated to provide 294 million sq ft of REITable space from the existing office stock, according to JLL’s report titled ‘India REITs – Heralding a new era in real estate investments’. The report adds that these REITable assets would be valued at USD 35 billion. Rising transparency levels, progressive regulations and a robust commercial real estate market in the country have made the segment a favorite among institutional investors, it says. Investors have allocated nearly USD 17 billion in the form of direct investments, as well as through entity-level investments from 2006 to 2019 in the office space.

India has already seen its first REIT (real estate investment trust) listing from Embassy Group-Blackstone JV in March 2019. With a portfolio of 32.6 million sq ft, the listing is also Asia’s largest, in area terms of area. Ramesh Nair, CEO and country head, JLL India says: “The listing of India’s first REIT heralds the institutionalisation of real estate assets and indicates enhanced maturity and professionalism in the real estate market. Growing knowledge of REITs will ensure acceptability and gradual increase of interest from retail investors. We expect to see other asset classes like retail, warehousing and hospitality also offering REITable assets in the times to come.”

Significance of India’s first REIT issue

  • Higher share of individual investors (57%) in the Embassy issue reflects readiness on the part of retail investors.
  • Oversubscription to the tune of 2.5x despite uncertainty in primary and secondary markets
    • Drying up of IPO pipeline (only 2 IPOs in January-March 2019 versus 14 during January-March 2018).
    • Decline in S&P BSE Realty Index by 10% during the last year.
  • REIT stock trading at 13% premium to allotment price, as on April 18, 2019.
  • Greater acceptability to newer investment instruments in the past – overwhelming response to IRB Infrastructure Investment Trusts (InvIT) and India Grid trust (oversubscribed by 8.6x and 1.2x, respectively) floated during May 2017.
  • Easy to understand investment avenue – Revenue visibility and higher predictability of returns, mainly depending upon occupier demand, rental growth and capital/ appreciation of office spaces.

REIT share by city

India's present REIT potential: 294 million sq ft of office space

The report states with 33% share of REITable space, Bengaluru will provide the highest REITable assets totaling 97.8 million sq ft, worth USD 10.7 billion. Mumbai follows Bengaluru with 17% share of total REITable space at 49.7 million sq ft worth USD 8.6 billion. Delhi-NCR and Chennai follow Mumbai both in space and value terms. With large and quality IT spaces occupied by prominent global players, Bengaluru will be the most favored city for REITable assets. Presence of single-ownership ready properties make it easier to aggregate the assets and manage them for REITs.

REIT share by property segment

Emergence of new office space occupiers, continued demand from IT/ITES, global in-house centers along with the BFSI space, are expected to keep office space demand robust over the next three years.

Out of the office space completion expected in 2019, we expect 34 million sq ft of REITable office space opportunity, as the existing regulations allow investment in under construction projects. Similarly, 2020 and 2021 will open up 32.8 and 34.3 million sq ft of new completion of REITable space, respectively.

Although commercial office space is expected to offer a large opportunity for development of REITs in India, other asset classes like retail, warehousing and hospitality also offer scope. India’s organised retail, with 253 malls in the top cities, occupies nearly 80 million sq ft space. Large institutional investors have already picked up stakes in fully operational malls, while many have invested in greenfield assets. The retail sector is becoming more and more organised, in terms of its mall spaces and would see emergence of REIT-ready space, after some years. The warehousing and logistics sector, which has undergone a paradigm shift after GST and the advent of new trends in technology, has witnessed a flurry of investment plans by major funds during the last two years.

See also: What is a REIT (Real Estate Investment Trust) and how to invest in one

As per a study by JLL India Industrial Services, 2018 witnessed a 22% y-o-y growth in total stock in Grade A & B warehousing space in the top eight cities, totaling 169 million sq ft, compared to 138 million sq ft, a year ago. Investments to the tune of USD 5.5 billion have been announced, as the outlook on returns prospects offered by the sector is positive. JLL expects emergence of REITs in this segment after a few years. The hospitality sector, which is showing signs of growth, will also offer options for REITs in future.

Samantak Das, chief economist and head of research and REIS, JLL India says: “Indian office space holds the potential to offer additional 101 million sq ft for REITs, from the new office completion expected during 2019-21. This could help upcoming REITs to gain from upside in rentals, as well as capital appreciation. While the strong institutional flow of funds into real estate will continue to provide initial momentum towards REITs’ growth in the country, active participation of insurance and pension funds in future, will help in the long-term growth of the market.”

Opportunities offered by REITs to retail investors and developers

While the launch of REITs symbolises that markets have definitely become more professional and transparent, this new investment vehicle will, in turn, ensure further transparency and maturity. This is because mandatory valuation of properties, regular updates, research coverage and disclosures relating to assets managed by REITs, will be essential, resulting in increased professionalism and transparency in real estate markets. Growing knowledge of the product will ensure acceptability and gradual increase of retail interest in this segment. The instrument will enable retail investors to partake of the massive opportunity in the commercial real estate pie, which until now was only a dream. This was largely on account of lack of access/restricted access to these assets, due to the value and volume of funds required.

From the developers’ perspective, a large source of funding is opening up. A small percentage of mutual fund investments made by retail investor getting channelised into REITs, would enable access to large funds for the real estate developer, as well as PE player.

Factors that will determine the future growth of REITs

The growth of REITs as an investment vehicle, would hinge upon the policy push given. Tax efficiency resulting from investment in REITs, will help Indian REIT players compete with other countries to attract investors. Firstly, tax benefits provided to investors and REIT sponsors, would be crucial for the growth of the REIT market and the policy needs to be consistent, in this regard. Secondly, the current regulations permit only rent-yielding assets for listing under REIT. Residential real estate segment (which accounts for 85% of the total under construction real estate value) is effectively left out. Regulations that will help to bring this segment under REIT need to be evolved for Indian real estate. Despite certain challenges, in terms of investor awareness about the product currently, interest is expected to increase over the years. Moreover, the success of this first REIT is a definite promise that there will be many more in the offing.

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