Commercial real estate in India has a new hope on the horizon after seeing the success of it first real estate investment trust (REIT). The Embassy Office Parks REIT, a joint venture between the Bangalore-based property developer and private equity firm Blackstone was oversubscribed and successfully raised Rs 4,750 crore from the primary market last week and has been listed finally.
One can say that this is an opportune time for REITs to make a grand entry in India. Thanks to the aggressive plans of businesses - both, local and global - commercial real estate in India is doing very well right now.
Done correctly, it may prove to be an answer to the liquidity crunch that has been crushing the sector for the past years.
REIT is a company that owns, operates or finances income-producing real estate. Modeled after mutual funds, REITs provide all investors the chance to own valuable real estate, present the opportunity to access dividend-based income and total returns.
REITs allow anyone to invest in portfolios of real estate assets the same way they invest in other industries - through the purchase of individual company stock or through a mutual fund or exchange traded fund (ETF). The stockholders of a REIT earns a share of the income produced through real estate investment - without actually having to go out and buy, manage or finance property.
There are various advantages that REITs offer to the investors: it has a low entry point - around Rs. 2 lakh - so that a common investor can add real estate to its portfolio at a much lower investment. The return on investment projection is between 8-14% in the short-to-medium term with considerable low risk. As regulations maintain that 80% of the REITs listings must be from rent-generating assets, it is less volatile than other asset classes like stock market, mutual funds and gold. REITs guidelines maintain that at least 90% of the net distributable income after tax will be distributed to investors at least twice a year.
In countries like UK, Canada, Singapore and Australia, REITs is a market proven model with proper regulations that gave fair returns over a period of time. As per reports, in Canada, the average return for REITs investor was around 10% in 2017, whereas in UK, it was somewhere around 8-10%. In India, as Grade 'A' commercial real estate had such a good run in the last two years in spite of various regulations that the projected five-year returns on commercial assets is a good 14%.
Data from a leading research firm in India indicates that approximately 50% of the total office stock in India can qualify for REITs - a definite improvement over the 30% two years ago. Clearly, the market is gearing up for the launch of REITs by developing investable commercial assets. Office space absorption remained steady with top 7 cities, witnessing an increase of almost 5% in 2017 as against 2016, and a 19% increase in 2018 as compared to 2017.
Demand for Grade 'A' office space has been growing and vacancy levels have been sliding south in prime locales. The success of Indian REITs will be based on growth prospects of a market that is still maturing, unlike developed countries (including in the Asia Pacific region) which are already mature. India is currently seeing a lot of new construction, so the average age of office buildings is lower than in cities in Australia or even Hong Kong. The report says this is why NRIs and domestic HNIs have shifted their erstwhile focus from residential properties to commercial real estate.
Support from the Government
To open the gates for foreign funding in the domestic real estate markets, REITs needs to be made attractive through various tax sops. Currently, there are various taxes that can repel investors from investing in REITs in India like sale of shares of assets attracts capital gains tax. Also, in some countries if a REIT is functional for a longer period then it is exempted from stamp duty. Such tax benefits will certainly make this asset class more attractive to investors who want to invest for a longer run.
We can say that global investors who have been bullish on Indian commercial real estate and the industry which was waiting with bated breath can heave a sigh of relief post the success of the first REITs IPO as the channels have been finally opened.
(The writer is National President, NAREDCO)