The global landscape of REITs has undergone a transformation since the listing of first REIT in the US in 1961. As of December 2022, there are 893 listed REITs, globally, and a combined equity market capitalization of approximately $1.9 trillion. This class of investments has grown in the last 30 years, from 120 REITs in two countries to 893 in 41 countries and regions. Asia, especially, has played a big role in this growth, with the number of REITs in the region going up by a huge 58% since 2015.

India, too, has embraced the REIT market as an asset class. Out of total office stock of over 700 million square feet (msf), about 394 msf of office space is REIT worthy, setting the stage for substantial future REIT listings. High-quality tenants, robust occupancy rates, strong Pan-India annual net leasing momentum of approximately 40 msf and consistent rental growth amplify the attractiveness of these office assets. The success of the four listed Indian REITs has caught the attention of global investors, who recognize the potential in the market.

A standout feature of the Indian REIT landscape is its considerable untapped potential. Currently, only about 10% of India’s total Grade A office stock falls under the REIT umbrella, indicating significant room for expansion. While Grade A office spaces have been the primary focus, recent developments, including the introduction of a retail REIT, signal the potential for diversification into other asset classes such as logistics and hospitality, offering new opportunities for investors and REIT players.

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In contrast to their Western counterparts, Indian REITs offer a unique combination of growth potential and a consistent dividend component. The growth in capital value and rents in the Indian office market is fuelled by the strong fundamentals of commercial offices in India. The evolution from domestic corporates purchasing office space for self-use in the pre-2000s to tech companies and Global Captive Centres preferring to lease Grade A office space with a wide array of amenities has transformed the commercial real estate model. The entry of Global Private Equity funds, Pension funds, and Sovereign funds has provided developers with capital, leading to a shift from ‘Build and Sell’ to ‘Build and Lease,’ ensuring a long pipeline of REIT-worthy assets. As per estimates, approximately INR 50-60,000 crore worth of commercial real estate is being built in India annually.

With India’s GDP on the rise, domestic corporations are emerging as a new driving force for office spaces in the coming years. Another noteworthy trend is the shift towards dedensification and the preference for institutionally managed Grade A offices. To put things in perspective, the per capita office stock across the top six cities in India is about 0.5 square feet (sf), compared to 16 sf in the US, 6 sf in the UK, and 5 sf in Singapore. The scope for growth due to dedensification is substantial. A trend accelerated by lessons learned during the COVID-19 pandemic is that tenants in India are increasingly drawn towards ESG-compliant, sustainable, and Grade A office buildings that offer ample opens spaces for collaboration, ideation and recreation.

While 2019 marked a record year for the India office market with the highest-ever net absorption of 47 msf, subsequent 2 years was impacted due to the pandemic. After 2 years of volatility, leasing momentum bounced back strongly in 2022, recording the second-highest net absorption of 36 msf, indicating the strong emphasis occupiers place on office space. The importance of office spaces in India cannot be overstated, given the nation’s infrastructure challenges, limited residential space, and the growing demand for secure, collaborative work environments.

Regulatory changes have played a pivotal role in increasing retail investor participation in REITs. Measures such as reducing the trading lot to as low as one unit have significantly enhanced REIT liquidity, making them more accessible. As of August 2023, the investor base for the four REITs has grown to over 200,000 unitholders. However, this number is still small compared to the 30 million mutual fund investors in India.

Globally, REITs are recognized as an asset class delivering superior returns over the long term. In India, the asset class is still at a nascent stage, with large segments of investor community unaware of its benefits. The four Indian REITs have recently formed the Indian REIT Association (IRA) to advance the growth and development of the REIT sector in India. IRA will closely collaborate with SEBI, the primary REIT regulator, to advocate for both business and investor interests while adhering to regulations.

In the Indian REIT landscape, two key issues are shaping the sector’s trajectory. Firstly, floor-wise SEZ denotification has the potential to unlock vacant spaces, leading to higher occupancy rates, increased rental income, and paving the way for more REITs, contributing to tax revenues. Secondly, the push to include REITs in domestic equity indices, mirroring global practices, can further boost liquidity and strengthen investor confidence in these instruments.

The meteoric rise of REITs on the global stage, coupled with India’s growing REIT market, signals a promising future for the country’s commercial real estate sector. As India continues to unlock the vast potential of REITs and adapts to the changing landscape, both domestic and international investors are poised to reap the benefits of this investment avenue.

(By Ramesh Nair, CEO, Mindspace Business Parks REIT. Views are personal)