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The Future of REIT’s in India and its impact the commercial real estate market

commercialAjay Jain, ED, Centrum Investment Banking & Head Real Estate Group

REITs have become a reality in India after the government exempted dividend distribution tax (DDT) from them. This investment vehicle will help developers monetize their commercial assets, provide liquidity to the commercial segment, attract domestic and foreign investors as well as give retail investors an opportunity to partake in this realty market’s growth. REIT managers would be able to see discounts of as much as 20%-30% when buying under-construction properties, as half completed projects are often cheaper than the finished product. SEBI’s proposal to increase REITs’ exposure to under-construction properties from 10% to 20% of total assets is another helping hand in the right direction. Allowing REITs to invest up to 20% in under construction assets will help widen the portfolio and the size of the REIT as well as give more flexibility to the REIT manager.

Private equity firms can earn returns of 20%-26% on commercial investments in India. Once REITs are able to invest more in under-construction properties, those similar returns could be available to retail investors as well. Furthermore, if stamp duty and registration charges are subsidized or exempted for REITs, a high proportion of revenues could be saved and return on investment would improve drastically.

Private equity players KKR, Blackstone Group LP with its partners Embassy Group and Panchshil Realty, real estate developers DLF, K Raheja Corp. have plans in the pipeline to introduce REITs. RMZ Corp, backed by Qatar Investment Authority (QIA) is looking to file a prospectus for a REIT as early as April next year and is looking to list its REIT by the third quarter of 2017.

Currently, there is about 160 msf of Grade A office space that is scheduled to be ready between 2016 and 2019 in the top 8 cities i.e. Mumbai, Delhi-NCR, Pune, Bangalore, Hyderabad, Kolkata, Chennai, Ahmedabad. These cities already account for about 415 msf of Grade A operational office spaces as of December 2015. This completed inventory gives REITs an opportunity to generate an estimated rental income of USD 5.4 billion, added to which the upcoming Grade A supply between 2016-2019 gives a potential incremental rental income of USD 2.5 billion by 2019.

With SEBI including hotels, hospitals and convention centers under the definition of real estate properties which can be introduced into a REIT, the hotel sector would definitely receive the right impetus from the REIT proposals. As we can see from above, once launched, REITs will have the potential to transform the Indian real estate sector.

 

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