The future of commercial real estate investment through REITs

June 22, 2021 12:17 PM

Real estate investment trust (REIT), a popular instrument globally, was introduced in India a few years ago aimed at attracting investment in the real estate sector by monetising rent-yielding assets.

With the pace of improvement driven by the availability and effectiveness of a vaccine, commercial real estate and REITs are likely to begin to recover in 2021.

By Ashok Mohanani

REITs have made a grand entrance into the Indian market at the right moment. Real estate investment trust (REIT), a popular instrument globally, was introduced in India a few years ago aimed at attracting investment in the real estate sector by monetising rent-yielding assets. When ‘Embassy Office Parks’, a joint venture between real estate development firm the Embassy Group and global private equity major Blackstone, listed the country’s first REIT, the industry projected that the investment vehicle would soon be a reality in India. The impact on real estate due to Covid-19 has prevailed for 5 quarters. For seven months in between the first and second wave, there was pronounced demand for pent-up and new commercial properties.

REITs to benefit commercial sector

With the onset of REITs, the commercial sector could witness better capital appreciation, as compared to the residential sector. The formation of REITs isn’t just a great boon to investors, but an advantage to the developers as well. For developers, it could unlock the value of their commercial assets. They can look at REITs as a vehicle to exit, at an extremely attractive capitalisation rate, thereby, reducing their high-level debts.

The investors will get capital appreciation and income from the property without having to essentially purchase and maintain it. It will open real estate to a broader spectrum of investors who are particularly looking to invest in the affordable housing sector. Commercial real estate is expected to do well in India in the coming months.

Also Read: Need for safer, bigger homes to drive demand for residential real estate

REITs outlook

With the pace of improvement driven by the availability and effectiveness of a vaccine, commercial real estate and REITs are likely to begin to recover in 2021. REITs have largely been resilient during the pandemic due to measures they took to strengthen their financial positions. Gradually, the situation improved as stores and businesses reopened. Much of the improvement was in the sectors that had been directly impacted by the shutdowns, lodging/resorts, retail, and diversified REITs.

We cannot predict the flow right now due to Covid-19 uncertainty but we can surely say there is demand for commercial office space, despite work from home. One has to admit that the residential market is flat which was further impacted by the second Covid-19 wave in March 2021. It will be important to distinguish between short-term or transitory effects of the pandemic versus long-term or permanent changes to commercial real estate markets. However, the future of office spaces remains bright despite the several hurdles caused by the Covid-19 pandemic. The situation is said to be improved as the worst of the second Covid-19 wave has passed.

The immediate confidence for the success of India’s first REIT led to preparations for the launch of the second one in India—Mindspace Business Parks REIT, backed by K Raheja Corp and Blackstone. According to CBRE’s 2020 Global Occupier Sentiment Survey, the importance of physical office space is likely to remain solid. 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.

Also Read: Why REITs are a good investment option vis-a-vis direct real estate purchase

The sentiment towards office space will remain positive in India, Therefore, investors are likely to continue to consider REITs as a stable income generator even 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. In the long term, the three REITs are expected to do well in terms of appreciation. In the past, for places like Mumbai, investors received an average return on investment of 6%. The rental yield is subjected to be around 6-7% for commercial space. The data is expected to remain stagnant even in the short-term investments.

In recent times, the Indian market has witnessed two successful REIT listings of Embassy Office Parks and Mindspace REIT, totalling Rs 9,250 crore. In the midst of the pandemic, Blackstone and Brookfield also announced the two biggest deals in the Indian real estate market, amounting to around Rs 25,000 crore. The recent Brookfield REIT listing was oversubscribed by a whopping 8 times. With this, the industry witnesses the long-term prospects of this sector.

The development has set a foresight of transparency, depth, and liquidity for the commercial real estate marketplace in India. The increased competition and transparency that ought to arise with a dynamic REIT market, will lead to better maintenance and operation of the assets. It is expected that a more developed and professional REIT sector, will significantly contribute to broadening the base of real estate investors, particularly by attracting institutional and retail investors.

Over the next few years, the appreciation can be reasonably good for investors. In the last two years, the sector has struggled a lot. However, in the coming years, the real estate sector will pick up at an average of 9-12% appreciation. With no other factor, the real estate (commercial and residential) is expected to bounce back in the next 3-4 months. We examine the positive impact it will have on the commercial real estate landscape in India in the long run.

(The author is President of NAREDCO Maharashtra. Views expressed are personal.)

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