Real Estate Investment Trust in India

India’s real estate industry witnessed a massive shift in the past decade, from traditional finance to an era of structured finance, private equity, and public offerings. Foreign investors, including global PE majors, have shown keen interest in India’s real estate market owing to its strong economic fundamentals, high potential for prolonged growth, and favourable demographics. As the share of structured funding in real estate investment grew, the introduction of alternative investment vehicles in the sector became the next logical step.

India’s dynamic investment landscape, continued faith of investors in Indian real estate, and sustained government support have resulted in the strong performance of Embassy Office Parks REIT. At the time of the issue, the IPO was oversubscribed by 2.57 times, to raise ₹4,750 Crs. The REIT also distributed ₹531.7 Crs. to its unitholders for the quarter ending March 2020 and ₹1,880 Crs. for FY20. The REIT’s share price grew by 10% in more than 15 months since its listing (between April 1, 2019 and July 17, 2020), compared with the BSE Realty Index which contracted by 25% during the same period. This shows the relative strength in the alternative Investment product against its benchmark by outperforming the S&P BSE Realty Index and the BSE India Infrastructure Index.

Globally, the share of REITs in the overall real estate market-cap is quite significant. The recent Mindspace issue, is now expected to be 40 per cent of the total real estate listed market-cap (as per the sample list enlisted below). So far, we have seen three major REITs. Canadian investment giant Brookfield Asset Management has filed a draft offer document with market regulator SEBI to monetise it’s Indian rental assets via a REIT IPO and raise around ₹4,500 Crs. This is the third REIT public offering in India after the Embassy Office Parks REIT backed by Blackstone and the Mindspace REIT also backed by Blackstone and developer K Raheja Corp. PSP Projects, Capacite Infra and Anant Raj make up the Indian Listed REIT Market.

*Market Cap as on 10^th January 2021

The current investment scenario and its impact on REITs

As business sentiments gradually improve during the unlock period, decision-making processes—which were previously delayed—have slowly restarted. Liquidity remains available as conservative financing continues, and private equities hold abundant dry powder. In the short term, most investors will look to either delay decisions or prioritise income security. But by mid-2021, we expect heightened focus towards assets with quality tenants and more stringent due diligence procedures for investment.

Moreover, the future of office spaces remains bright despite the growth hurdles caused by Covid-19. According to CBRE’s* 2020 Global Occupier Sentiment Survey (conducted in June 2020), the importance of a physical office space is likely to remain intact. 38% of respondents said that the physical office space will remain as important, if not more. Additionally, 70% of the survey respondents were also confident about setting long-term real estate strategies amid the pandemic.

In India as well, the sentiment towards office space remained positive, visible via Embassy Office Parks REIT collecting 98.5% in Q2 and 99.9% in Q1 of FY 2021 respectively. Therefore, investors are likely to continue to consider REITs as a stable income generator in the long run, given that India’s office sector has traditionally witnessed high occupancies backed by long pre-existing leases and lease extensions from corporates. Currently, less than 10% of ready-to-move-in space is available in top micro-markets across cities due to previously higher pre-lease quantum.

Separately, in the largest real estate transaction in India, Brookfield bought 12.8 million sq. ft of Bengaluru based RMZ Corp’s for $ 2 billion. Blackstone, which has been investing in the country longer than Brookfield, last year bought Piramal Glass Pvt. Ltd at a billion-dollar valuation, and signed a $1.5 billion deal with Prestige Group to buy the latter’s office and retail assets for $1.5 billion. It is also in the process of buying out the mutual fund business of L&T Asset Management Co. in another billion-dollar deal, as it looks to bolster its investments in the financial services space.

The way forward

Going forward, the REIT landscape in India is likely to further evolve to include varied asset classes in the medium- to long-term. The outbreak of Covid-19 has accelerated the adoption of cloud-based services, as well as advancements in Big Data, Industry 4.0, and the Internet of Things (IoT)—which would amplify the demand for data centres. While the office sector is expected to remain integral in the next few REIT listings in the country, the asset mix of REIT portfolios could thus also see some modifications as developers may add essential facilities such as data centres.

At this point, India is not ready for residential REITs, as the residential property market is currently highly fragmented and unorganised. It is skewed towards developer directly selling properties to fund their working capital requirement rather than creating a trust structure and monetizing their properties. However, a new class of assets such as telecommunication infrastructure, industrial parks including distribution centres, warehouses, data centres, retail malls and healthcare facilities, including senior living facilities, may be offered under this product. Further, the country could also see an industrial and logistics REIT in the coming years, as the sector is likely to see the entry of mainstream global and domestic players introducing quality space over the coming quarters.

There is merit for a potential public sector REIT in the long term, given that several PSUs could potentially unlock their land holdings by monetising their assets. Support from the government in Taxation and Accounting aspects is also provided with market regulator, SEBI laying down SEBI (REIT) Regulations, 2014. Ultimately, we believe that a healthy balance sheet, a strong management team, and a well-planned portfolio would enable future REITs to tide over near-term uncertainties and ensure long-term success.