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.”

India's real estate landscape is undergoing significant transformation, driven by rapid economic expansion and the burgeoning growth of urban centers such as Mumbai, Delhi, and Bangalore. This economic surge has resulted in an extraordinary demand for both residential and commercial properties, creating a fertile ground for investment. The adoption of cutting-edge technologies like virtual reality (VR) and augmented reality (AR) is further accelerating this growth. These innovations have fundamentally changed how properties are marketed and experienced, offering potential buyers immersive, virtual tours that provide a comprehensive understanding of prospective investments. Despite occasional setbacks from regulatory changes and market fluctuations, the resilience of the Indian real estate market remains evident. The vast population, combined with ongoing urbanization, ensures a continuous demand for housing and commercial spaces. Government initiatives, such as "Housing for All" and smart city developments, are boosting confidence in the market's long-term potential. These initiatives not only increase demand but also present opportunities for developers and investors to engage in large-scale infrastructure projects. The introduction of real estate investment trusts (REITs) has also democratized the commercial real estate market. Previously accessible only to institutional investors, REITs now allow retail investors to diversify their portfolios and benefit from the sector's growth. Economic Expansion and Urban Growth India's economic growth has been a key driver of urban expansion. Major cities like Mumbai, Delhi, and Bangalore have become bustling economic hubs, attracting people seeking better job opportunities and living conditions. This influx drives demand for residential properties while also spurring the development of commercial spaces. The synergy between economic growth and urbanization creates a robust foundation for the real estate sector, ensuring a steady flow of investment opportunities. Technological Advancements The real estate sector has embraced cutting-edge technologies such as VR and AR, revolutionizing property marketing and visualization. Potential buyers can now experience properties through immersive virtual tours, gaining a more profound understanding of their investments. These technologies not only enhance the buying experience but also allow real estate marketers to reach a broader audience, increasing the sector's appeal. Resilience Amidst Challenges The Indian real estate market has demonstrated remarkable resilience despite challenges such as regulatory changes and market fluctuations. The regulatory environment, though complex, is designed to enhance transparency and protect buyers' interests. While these regulations can create short-term uncertainties, they ultimately contribute to a more stable and trustworthy market. Market fluctuations, driven by economic cycles, are a natural part of the investment landscape. The Indian real estate market's ability to recover from downturns highlights its resilience and long-term growth potential. Population Growth and Urbanization India's large and growing population, coupled with urbanization trends, ensures a continuous demand for housing and commercial properties. As people migrate to urban areas seeking better opportunities, the need for residential and commercial spaces increases. This ongoing demand creates opportunities for developers and investors across various market segments, from affordable housing to luxury residences and commercial properties. Government Initiatives and Infrastructure Development Government initiatives like "Housing for All" and the development of smart cities are key drivers of the real estate market's long-term potential. "Housing for All" aims to provide affordable housing to all citizens, driving the construction of millions of new homes and stimulating demand. Smart city projects focus on creating urban areas with modern infrastructure, sustainable living solutions, and advanced technologies. These initiatives attract both domestic and international investors, eager to capitalize on India's evolving infrastructure landscape. Real Estate Investment Trusts (REITs) The introduction of REITs has opened the commercial real estate market to retail investors, previously dominated by institutional investors. REITs allow individuals to invest in income-generating real estate assets without owning or managing properties directly. This democratization of real estate investment offers new opportunities for portfolio diversification and income generation. REITs, traded on stock exchanges, provide liquidity and regular income through dividends, making them an attractive investment option. Challenges and Future Prospects While the Indian real estate market faces challenges such as regulatory complexities and market fluctuations, its dynamism, supported by technological advancements and favorable government policies, underscores its resilience and attractiveness. Regulatory measures, though challenging, aim to streamline the sector, enhance transparency, and protect consumers. These regulations contribute to the market's long-term stability and credibility. Looking forward, the Indian real estate sector is poised for continued growth, driven by urbanization, technological integration, and supportive government policies. The focus on affordable housing, smart city initiatives, and the growth of REITs will attract more investors and developers. Technological advancements will further enhance real estate marketing, property management, and investment strategies, increasing the sector's efficiency and appeal. In conclusion, the Indian real estate market offers a blend of opportunities and challenges, making it a compelling investment arena. The dynamic interaction of economic growth, technological advancements, and supportive government policies creates a resilient and attractive investment landscape. For those seeking long-term growth and diversification, the Indian real estate market presents promising prospects, underpinned by the nation's expanding economy and urban development.