By Michael Holland
Nearly three years since Real Estate Investment Trusts (REITs) took root in India, the asset class has emerged as an essential component for long-term, diversified investment portfolios. The three listed REIT’s have in aggregate raised over Rs 16,500 crores as primary equity and touched a combined market capitalization of Rs 59,000 crores even as the pandemic ebbed and flowed over the last two years. In fact, since it listed in 2019, Embassy Office Parks REIT has clocked a 100% payout for 10 consecutive quarters, distributing over Rs 4,800 crores to unitholders with over 30 per cent total returns. As the curtains close on 2021, it’s an opportune time to understand the factors that have driven REIT returns in India and what the future may hold for retail investors.
COMMERCIAL REAL ESTATE INVESTMENTS AND THE REIT OPPORTUNITY
Commercial Real Estate has for long remained inaccessible primarily to retail investors due to high-ticket prices, illiquid long-term nature of investments, tax implications, and difficulties in administering and managing significant assets. Now, retail investors can build wealth through commercial real estate through the REIT product – a liquid, tradable unit with tax efficiency and high-quality management.
Indian REITs typically boast quality office assets, leased to some of the best companies in the world. The product is professionally managed, highly tax-efficient, and is backed by a strong regulatory framework at par with the developed world. By their very nature, REIT assets are relatively stable owing to the long-term leases with MNCs and Fortune 500 companies. Moreover, they offer regular tax-efficient yield through quarterly distributions, and in tandem offer potential for capital appreciation owing to the increase in scale and/or value of the underlying physical assets. This makes them an attractive diversification instrument across market and economy cycles, which was highly evident throughout 2021.
2021: A MILESTONE YEAR
The latter part of 2021 saw the Commercial Real Estate (CRE) market experiencing a rebound in leasing demand across key office markets in India, led by Bengaluru, Mumbai, and Delhi NCR. This demand was driven by several factors – the unprecedented increase in hiring especially in IT and ITES industries, demand for de-densification and Grade A spaces that offer a safe work environment, and a unanimous sentiment towards returning to the office, often in a more flexible, hybrid avatar.
Q3 witnessed a 46% increase in gross leasing as compared to the previous quarter, as per Cushman & Wakefield, which bodes well for REITs. The quality of tenants and asset location in prime micro-markets was the primary reason that REITs did not suffer in terms of rental collections and are now poised to benefit from the leasing traction expected from the global technology shifts accelerated by the pandemic. As an example, Embassy REIT has 74% of its portfolio in the tech-hub of Bengaluru, and Tech/Global Captive Centre occupiers contribute 70% of its leased area.
A reduction in the minimum subscription value as well as trading lot size by SEBI – Rs 300 – 400 from the earlier Rs 50,000, opened up the gates for retail investors to invest in REITs. Further, a growing appreciation for the fact that a major portion of the REIT distributions is exempted from tax was another aspect that saw REITs becoming an important portfolio addition for retail investors in India. An indicator of this increase in interest from retail investors is that the unitholder base of Embassy REIT tripled in 2021.
THE 2022 OPPORTUNITY
If 2021 was the year that underscored the strength and resilience of the REITs in the face of the global pandemic, 2022 is likely to be the year that will see a greater number of employees back at work, continued hiring in the tech sector, enhanced quality of workspaces including de-densification, and technology-integrated operations driving the demand for offices. Accordingly, the office segment will continue to drive a major share of the overall real estate demand volume in 2022 along with data centres. In fact, NASSCOM estimates that 500 new Global Capabilities (GCCs) will come up between 2022 and 2025; significantly buoying the leasing demand in tandem with rapidly growing sectors such as technology, e-commerce, and financial services.
This, along with a positive commercial real estate outlook in India over the next few years, especially for quality leased premises, is expected to significantly drive demand for investments through REITs. As per ICRA estimates, the market expects fundraises totaling Rs 3,50,00 crores through infrastructure and real estate investment trusts in 2022.
High-growth potential for the asset class, a rebounding business environment, reduction in entry price-points and improved liquidity, the comfort of a strong regulatory framework and asset management, tax-friendliness, and low volatility even amidst the pandemic. Indian REITs can deliver so many items on the wish-list of retail investors in 2022.
(Michael Holland is the CEO of Embassy REIT. Views expressed are the author’s own.)
