Asia saw the emergence of Real Estate Investment Trusts (REITs) as a collective investment vehicle for uncorking the market potential of real estate at the start of the 21st century.
- By Nitin Agarwal
Asia saw the emergence of Real Estate Investment Trusts (REITs) as a collective investment vehicle for uncorking the market potential of real estate at the start of the 21st century. From there, it has taken India almost two decades to list its first REIT on the Indian bourses. It is an exciting time for the commercial real estate industry with the sector predicted to scale a higher growth trajectory given the fact that India’s per capita office space is far lower than that of the developed countries. Also, with the service sector playing a pivotal role in the exponential growth of the Indian economy, the demand for quality office space assets should continue to outpace supply.
The listing of the first REIT is the culmination of the Indian commercial real estate industry coming full circle over the last decade. The groundwork for the roll-out of REITs in India was laid with the country becoming a preferred global service outsourcing hub. The demand for premium office spaces largely driven by IT/ITes led to the development of Grade-A fully integrated office parks equipped with larger floor plates, modern infrastructure and world-class amenities attracting large MNCs as tenants at competitive rentals.
This model proved to be a huge success and drew the attention of global investors to the investment potential of Indian commercial real estate. With increase in funding for the ever increasing demand for office space, there was a spurt in global institutional investor partnerships with credible and experienced developers in the space. Over the last few years, as compared to residential real estate which has seen sluggish sale and high execution & compliance risks leading to scattered investor interest, commercial realty has become a preferred investment destination with investors. The development of commercial office space assets of over 600 M sqft across India stands testimony to the exponential growth of commercial real estate in the country.
The roll-out of REITs will not only facilitate a viable exit strategy for global investors with large exposure to Indian commercial real assets but also shall also provide monetization of their asset holdings and enhance their liquidity positions. More importantly, a vibrant community of investors including institutional, HNIs and retail investors will get an opportunity to invest in an emerging financial product that holds the promise of stable long term returns akin to a bond market as well as provide reasonable growth through escalations in rentals and a probability of capital value appreciation over a period of time
Rather than investing directly in real estate which can be a tedious process and relatively illiquid, investing in a portfolio of income generating real estate assets through REITs could be a better investment strategy. This has advantages of diversifying risks, professionally managed portfolio ensuring timely dividend payments and should yield higher long term returns .This however needs to be tested as it is still early days for the REIT market in the country. REITs have the proven potential to leverage the investment competencies of Indian commercial real estate. Having said this, one needs to critically examine the first REIT listing in the light of setting the right future benchmarks on valuations, future growth prospects and sound corporate governance.
Hopefully, the concerned stakeholders would have learnt from the experience of the first few Infrastructure Investment Trust (InvIT) listings and the broader investor community, especially the retail investors, would have gained a pragmatic perspective on the product, portfolio and market dynamics to make informed decisions on such investments. The performance of the first REIT and investors’ response will pave a path for all the other real asset monetisation in India not just limited to commercial space but to any other real asset heavy industry in public and private enterprise and shall provide much needed growth capital for the country.
The author is CEO, India Market, Equitativa Group. The views expressed are the author’s own.