Indian realty is on the cusp of flexing a new set of muscles as the sector prepares to embrace Real Estate Investments Trusts (REITs). The globally successful investment vehicle has mammoth potentials in India. Rent yielding office inventory alone accounts for 537 million sq. ft.
Though not all of this inventory may be REITable given strata titles and asset quality, there is no denying the fact that REITable office inventory, quality storage logistics, leased single ownership and shopping centre inventory together create a massive potential for a healthy REIT in India.
A recent announcement by the Reserve Bank of India (RBI) permitting banks to invest in REITs is probably the icing on the cake. The move demonstrates a robust belief from Indian regulatory bodies towards creating a vibrant REIT market. Already a beeline of global and domestic financial institutional are glued to the Indian REIT story. The narrative would witness compelling new shades when banks enter the fray.
Our assessment indicates that REITs would provide stable, low risk annuity returns to investors, thereby empowering banks to diversify their equity portfolios. Statistics show that REITs outscored other investment channels in the recent past.
Returns on equity of traded REITs fared better than returns on leading stock markets indexes globally over the past 10 years. Five year returns for REITs was between 7 and 16 per cent globally. With Japanese and Malaysian markets providing returns in the range of 8 to 10 per cent, expectations from other Asian economies is on the rise.
The model has reaped rich yields across the globe. More than 20 countries now have REIT or a similar structure. Since, its birth in the US close to five decades back the REIT market has mushroomed across the globe. In Asia, REITs debuted in Japan followed by Singapore, Indonesia, South Korea, etc. If one had to plot this growth story the graph reflects a gradual beginning but substantial growth courtesy investor-friendly changes in the REIT tax and overall regulatory framework.
Internationalisation of REITs has deepened the global real estate sector and boosted market liquidity. Key takeaways from international REITs which currently do not form part of the REIT regime in India are concepts such as stamp duty remission and overseas property portfolio.
The timing is also apt for India’s REITs debut. Huge investments are required to meet India’s housing needs and additional investments would be required for commercial and urban infrastructure to cater to this demand. India needs to develop about 110 million housing units by 2022 to meet its housing deficit.
In addition the Indian median population is projected to increase from 26.4 in 2013 to 36.7 in 2050 according to the UN World Population. This means that the employment demand of a large pool of young workforce employment would surge which in turn would fire up the development of commercial real estate.
All in all we feel that REITs has the potential to transform the Indian real estate sector. While a cursory look may identify benefits such as the improving fund availability for the sector and a new investment vehicle for the public, further probing would highlight the immense gains that would occur on account of elevated transparency and governance standards.
The author is Executive Director and Head of Capital Markets, Knight Frank India