India REIT Launched. Should you invest?
India’s first REIT (Real Estate Investment Trust) has finally been launched. This is a big step in the field of real estate that will take it to the next level. Now, is it a good investment option for you?
Now for those who do not know what REIT is and who started it up in India. Here it goes! REITs are companies that own or finance income generating properties across a wide range of property sectors. It is an obvious fact that these companies need to meet a certain range of requirements just to start-off. Most of the REIT’s offer a wide range of benefits to the consumers. The company that started REITs in India is called the Embassy Group; a Bangalore based company that offers beautiful luxury apartments.
REIT’s enable individuals to generate income and capital appreciation with money that is a small fraction of what would really be required to buy an entire property. This is something like a mutual fund but it’s something related to it just on the surface. So, basically when you invest in REIT you technically own a chunk of land that is going to be used for generating money and an appropriate share based on your investment will be shared with you.
It is very important for REIT’s to be listed on the stock exchange for obvious reasons, that is for it to be sold at any given time. The one issue with it is LIQUIDITY. As selling at any given time will not give you the expected returns as planned earlier. This also requires to be perfectly timed while selling!
REIT’s can only be judged with a lot of experience and a track record of how it has performed over the years. Now, in India it hasn’t been very long since this has been launched so there is no track record or History that can be taken as reference. But, in other countries like The United States have had very fruitful returns after making investments in this field!
Which again brings us back to the point, should we Invest? So, the answer would be Yes and No. Why? Because stats in the other countries where this IPO was launched went on to be the big game players which is in favour of the Yes and No because there is no assurance that it will do good even in India as there are no past stats.
India’s commercial realty market has been on an upswing over the past few years. Well-managed, high-quality properties with an average tenancy of three years and nearly 90% stable occupancy have good cash flow visibility. They have, therefore, seen more investments by global private equity (PE) funds. Commercial real estate continues to see positive trajectory with improved profitability and comfortable leverage. Over the next 2-3 years, too, well-managed Grade A properties are likely to see 5-10% escalations per annum.
India’s top 10 commercial real estate owners alone, which include both developers and funds, have a portfolio of around 184 million square feet (MSF) translating into an annual lease rental income of over Rs 17,000 crore. The portfolio of steady cash flows has the potential to raise as much as Rs 1.5 lakh crore through the real estate investment trust (REIT) route.
While investor interest in the residential segment is declining fast because of limited property price appreciation and inability to monetise assets, REITs can be a potential investment option, providing assured and ongoing returns. REITs, which invest primarily in completed, income-yielding real estate assets, are similar to mutual funds, and can be listed and traded on stock exchanges. Through REITs, PEs can divest at the portfolio level instead of individual assets. This would sync better with their typical exit timelines of 7-10 years.
While regulations allow REITs to have a minimum asset valuation of Rs 500 crore, not all commercial portfolio developers/ owners will take the route. Portfolios with minimum rentals of over Rs 1,000 crore, translating into asset valuation of Rs 10,000 crore, which can absorb higher transaction costs and comply with regulations, are more likely to use this option.
REITs account for nearly 50% of the capitalisation of the real estate industry in markets such as Singapore and Japan, where they were introduced nearly two decades ago, while they account for 96% of the market capitalisation in the US which pioneered REITs in the 1960s. These trends also underpin the opportunity for India considering the real estate sector’s market capitalisation (cap) of nearly Rs 1.5 lakh crore (ex-REITs). However, lack of incentives or regulatory support, like in Hong Kong, can restrict this growth. REITs were introduced in India in 2014, and over the five years a spate of regulatory changes have made it attractive to developers while also protecting the interests of investors.
However, given the high level of compliance and stringent regulatory requirements for REITs, developers with smaller commercial portfolios would continue to use lease rental discounting loans, which are accessible at rates as low as 9%. Furthermore, developers who prefer to retain the capital appreciation opportunity and not dilute their stake, will not prefer the REIT route.
“Global investors have had their sights set on India’s burgeoning commercial real estate market for some time,” said Shobhit Agarwal, CEO at Anarock Capital. “With the success of the Blackstone-Embassy REIT, a positive signal has gone out to global investors to stake their claim. At the same time, REITs have opened new investment avenues for domestic retail investors.”
Agarwal said the success of REITs in India could have an overarching effect on the entire real estate sector.
Of the total capital flows into the sector over the last five years, 70% has gone into rent-yielding assets. According to research by CRISIL, JLL, ANAROCK Capital and JM Financial, the Indian REIT market may grow to $22-40 billion over the next few years.
“With the underlying commercial office space growing at 18% annually over the past 19 years along with rent escalation (generally 5% every year), we still have one of the lowest rental rates, office space and capital values across major global cities,” said Suhas Harinarayanan, real estate analyst with JM Financial. “We believe the demand for grade A commercial real estate remains a secular trend and REITs offer the best way to play the theme.”Market tends to be cyclical, and historical data suggests that property values generally appreciate over time. By carefully studying market trends and understanding the dynamics of the local real estate landscape, investors can position themselves to benefit from this natural appreciation. In essence, investing in real estate becomes a long-term strategy for wealth accumulation