REITs market in India poised to evolve in 2021, led by Bengaluru: JLL

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Updated: Mar 23, 2021 8:14 PM

Attractive tax structures, relaxing of norms for sponsors etc. aim to make Indian REITs more attractive to global equity investors and domestic institutional and retail investors.

With some of the major players in the country already working on building quality portfolio across diverse asset classes – the nation is also likely to see more of retail, warehousing & hotel assets as part of REIT offerings in the near future.

India’s Real Estate Investment Trust (REIT) market will enter a period of prolonged growth, with more REITs forecast to be listed in 2021 and beyond. According to JLL, as REITs grow through organic and inorganic means and more REITs get listed, the number of buyers and sellers will broaden significantly, further increasing market liquidity and yield compression. With some of the major players in the country already working on building quality portfolio across diverse asset classes – the nation is also likely to see more of retail, warehousing & hotel assets as part of REIT offerings in the near future.

Continued government support for the REIT sector is also expected. Real estate is the second largest employer and its contribution to Indian GDP is expected to reach 13% by 2025. This makes it a high priority sector and the current government continues to bring in major reforms to make it more accessible and attractive for foreign investors.

SEBI – the governing body for REIT – has already come out with a series of amendments favouring the investor community last year. Further to strengthen investor interest in REITs, the Union Budget 2021-2022 announced further measures to ease financial access by enabling FPIs to invest in debt instruments of REITs, and separately providing tax reliefs by exempting TDS on dividends paid to REITs. Attractive tax structures, relaxing of norms for sponsors etc. aim to make Indian REITs more attractive to global equity investors and domestic institutional and retail investors.

“The continued success of listed REITs in India can be attributed to sponsor quality, track record and ability to stay transparent and deliver predicable returns. JLL believes that India’s current office markets across seven major cities have potential space of 284 million sq. ft that could be securitised with an estimated value of $36 billion (Rs 262,800 crore). This estimate was based on buildings that meet two important criteria – single ownership and large floor space with high occupancy rate.The office space led the pack among asset classes in India, with direct office transactions reaching $3.1 billion in 2020, underscoring its importance to future REIT listings in India,” says Dr Samantak Das, Chief Economist and Head Research & REIS, JLL.

Bengaluru is identified as India’s largest source for potential assets available for securitisation, accounting for 31% or 88 million sq ft of REIT worthy asset, valued at $11.16 billion (Rs 81,468 crore). The city, with large IT spaces housing global occupiers, will be the most favoured market for the newly-listed REITs, given that most assets are singly owned by developers or large funds, allowing for the aggregation of assets into managed structures.

The listed markets in India performed well, providing confidence in the future of the India REIT sector.

The forecast for more listings follows the successful launch of India’s third sponsored REIT in early 2021. Since the first India REIT was listed in 2019, a framework for improved liquidity, transparency, and corporate governance was created for REITs to thrive.

“India’s REIT evolution has been both rapid and revolutionary for the real estate sector. The fact that the closing of transactions was made possible even amidst a pandemic has demonstrated the maturity of the market and transformed India’s real estate corporate finance landscape and market liquidity. Furthermore, we are encouraged by the larger domestic institutional investor participation in the more recent listings and the emergence of a public private arbitrage play welcomed by all investors in the market,” says Priyank Shah, Director, Capital Markets, Asia Pacific, JLL.

There are opportunities for institutional investors to participate in this structural theme, potentially by assembling complementary portfolios for securitisation into REITs, or co-investing with existing platforms pre-IPO. Despite challenging socio-economic environment, the current REIT framework in India as compared to other mature markets has already set the stage for continued success for the sector. These include the quality of sponsors, their market experience and relationships within the India real estate eco-system and the quality of the first REIT portfolios, including the high-quality tenant profiles, lease expiry profiles and diversity of assets.

Several factors have given investors and regulators more confidence in the REIT space’s future in 2021 and into the future. The first two listed REITs’ healthy performance lowered the marginal cost of capital for Indian real estate. Additionally, REIT sponsors successfully recycled capital post-listing through asset divestments and rationalisation of their equity stakes, which raised institutional groups’ confidence to acquire larger portfolios.

“As listed REITs grow organically and inorganically and more REITs get listed, these structural themes will become even more pronounced. Some major players are already building quality portfolios across diverse asset classes and we could potentially see more retail, warehousing and hotel assets in future REIT offerings as well,” says Regina Lim, Head of Capital Markets Research, Asia Pacific, JLL.

The market’s fundamentals make it a high-priority sector and have prompted the government to bring in major reforms to make it more accessible and attractive for foreign investors.

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