_India: REITs to be a reality soon

by Vivek Rathi, Vice President - Research

Trough REIT, developers can exit an asset as soon as it  is completed and purely  focus  on development activity, which has a different risk-return profile. This is possible as REIT helps attract investments from local and global investors who prefer a recurring, safe and moderate-yield income. 

It is needless to say that REIT will help improve liquidity in the real estate sector as it will help owners of completed assets to raise capital from investors. For investors, the REIT can provide a new investment option with ongoing returns, elevated transparency and governance standards.

Moving closer to the reality

Initially proposed in December 2008 by the Securities and Exchange Board of India (SEBI), the SEBI (Real Estate Investment Trusts) Regulations, 2014 was finally notified in 2014. However, even two years after it came into effect we have not seen a single REIT offering in the market. However, progressive changes in taxation and restructuring of the concept at par with global REITs have been undertaken by the government after the notification in 2014.

REIT-able universe

Table: Select eligible REIT property segments 

^{Source: Knight Frank Research}

The REIT-able arena may cover completed and rent-generating real estate assets. It is estimated that approximately USD 121 billion or 1.73 billion sq. ft. occupied CRE across office, retail and warehouse segments could potentially benefit from the REIT opportunity. In the case of office and retail let us look at the top seven cities such as Mumbai, NCR, Bengaluru, Chennai, Hyderabad, Kolkata and Pune. The all-India estimate has been considered for the warehouse market. The ambit of the REIT-able universe extends to almost all rent-generating real estate. As a result, rented residential property can also be considered for the purpose of REITs. But since an institutional rental market is missing in the residential segment we shall not consider it in our REIT-able space estimates.

^{Source: Knight Frank Research}

Demonetisation gains

The move on demonetisation of high value currency notes led to a deluge of bank deposits thereby significantly pushing up the liquidity in the banking sector. In effect, this led to a considerable fall in government bond yields. 

From the REIT perspective, the decline in government bond yields and the overall interest rate regime has increased the spread with prime office properties. This has also led to the compression of the capitalisation rate for prime office assets, which are perfect candidates for REITs. This compression in the capitalisation rate has led to the upward revaluation of office property in prime markets such as the Bandra Kurla Complex in Mumbai, thereby making REIT listing more attractive.