Real estate developers may raise more than $25 billion over the next three years by listing their rent-yielding commercial properties through the Real Estate Investment Trusts route, according to Anarock. Earlier this year, global investment firm Blackstone and realty firm Embassy group launched India’s first REIT to raise Rs 4,750 crore. Their joint venture firm Embassy Office Parks listed its rental assets on the exchanges.

Currently, the top seven cities — Delhi-NCR, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad and Pune — have close to 550 million sq ft Grade A office supply – of which 310-320 million sq ft is ‘REITable’ as of now, he added. “The recent success of India’s first listed REIT offers much-needed hope to the beleaguered real estate sector. The enthusiastic response to Embassy Office Parks’ REIT launch – and its more-than-satisfactory performance – is priming investors for similar REIT opportunities, which in turn will open up more funding avenues for the sector,” Agarwal said.

Several large developers are keen to list their commercial assets. According to Anarock, Prestige Group is planning to list its first commercial REIT very soon and has already started segregating its residential, office, retail and hospitality businesses. It may also launch a retail REIT as and when the opportunity arises. Other players in the REIT fray are RMZ Corp, K Raheja Corp, Godrej Properties and Panchshil Realty.

Benefits of REIT

REITs are investment instruments that pool capital from investors to purchase and manage income-yielding real estate assets or mortgage loans, and can be traded on major stock exchanges like BSE. These instruments would also enable banks to free up their balance sheets by reducing loan exposures and creating headroom for fresh projects. REITs are considered viable investment vehicles because of multiple advantages:

  • With a low entry point for investors, it’s easier for many to add commercial real estate to their portfolio at a much lower investment.
  • REITs offer handsome returns with projected ROI pegged between 12-14% in the long term, with minimum risks.
  • These investment instruments are also less volatile than other asset classes such as the stock market, FDs, mutual funds, etc., because regulations maintain that 80% of the REITs listings should be of rent-generating assets.
  • With institutional investors vying to park funds in Grade A office stock across top property markets, the rents for these listed properties is likely to grow.
  • REIT guidelines also direct that 90% of the net distributable income after tax to be distributed to investors at least twice a year.

Boon for Developers

According to Shobhit Aggarwal, “Commercial REITs may raise over $25 billion for Indian real estate over the next three years. This involves the listing of more than 150 million sq. ft. of rent-yielding Grade A office properties across top seven cities – covering 25-30 percent of the overall Grade A office space in these cities. REITs would help commercial developers improve their liquidity by unlocking the value of their assets to raise capital.” Since REITs are a proven success in developed nations, global investors are keen to capitalize on India’s high demand for Grade A commercial real estate. For domestic investors, REITs are an opportunity to invest in commercial real estate at fairly lower entry levels and add an attractive level of diversification to their portfolios.

REITs couldn’t have come at a better time for Indian commercial real estate developers as they provide them a viable funding alternative. They will help developers to improve their liquidity by unlocking the value of their assets and raise capital. Developers are also free to exit the commercial asset and focus on their core task of developing real estate. This option is particularly beneficial for developers facing a cash-crunch, as REITs give them an opportunity to make an exit when the property is fully operational, and reap maximum returns on investments.

Retail and residential REITs

Retail REITs focus on owning and managing the retail segment and can be a viable instrument for mall developers to raise funds. The Indian retail scenario is bound to benefit from REIT funding, but issues like smaller lease tenures and business models must be ironed out before a retail REIT is launched. In fact, several institutional investors have already bought stakes in malls, while many have funded greenfield assets. As India’s retail sector matures and gets more organised, a retail REIT seems likely in the foreseeable future. For India to truly join this elite club of global REITs markets, tax benefits must be offered to make the investment instrument more functional and lucrative in the long run. According to Agarwal REITs in residential segment would take time. The draft Model Tenancy Act, 2019 will make rental housing a more attractive investment play. Agarwal further said that for Indian residential REITs to succeed as they have in countries like Singapore and the US, rental yields need to significantly surpass the current 1-3 per cent.

Source:

  • https://economictimes.indiatimes.com/markets/stocks/news/realty-firms-may-raise-25-billion-in-3-years-through-reit-listings-anarock/articleshow/71503978.cms
  • https://www.einnews.com/pr_news/498720094/india-can-raise-over-25-bn-with-reits-in-next-3-years-anarock
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