India REITs outperform BSE Realty Index, give 14% returns since inception

Currently, the top 7 cities of India have around 550 mn sq ft Grade A office supply, of which 310-320 mn sq ft is REIT-able.

Since its listing on the Indian bourses on April 1, 2019, leading up to June 25, 2020, Embassy Office Parks REIT has yielded more returns than those generated by the BSE Realty Index. While the former has given 14 per cent returns during the period, the later yielded negative returns of – 20 per cent during the same period, as per a report by ANAROCK Capital.

REITs, in fact, were introduced in India only recently, and currently focus only on commercial offices. However, the REIT market opportunity is still significant in India and also remains largely untapped.

Surprisingly, REITs have existed globally for around 60 years. For instance, between 1960 and 1970, they were launched in the United States, Netherland, New Zealand and Taiwan, while between 1990 and 2000, they were introduced in Brazil, Canada, Japan, Singapore, etc. Across the world, some of the largest REITs own property types such as industrial, telecommunication infrastructure, retail malls, data centres, healthcare facilities, residential projects, commercial offices, as well as several other assets.

The US REITs market capitalization, as of August 2019, was 96 per cent of the realty market while in Singapore and Japan, it was 55 per cent and 51 per cent, respectively. In comparison, in India it was only 17 per cent as of August 2019. However, in spite of the markets being in a turmoil over the past several months — further exacerbated by the Coronavirus outbreak which impacted businesses and stock markets alike — there are opportunities galore in the REIT market in India, according to the report.

At present, Embassy Office Parks REITs is the only publicly-traded REIT in India and as of 26th June 2020, its market capitalization was around $3.45 billion (17 per cent of the listed real estate stocks’ market capitalization in India). However, India’s maiden REIT has paved the way for many others to follow suit. For example, another realty major K Raheja Corp is now gearing up to announce their REIT listing.

“We are witnessing consolidation of portfolios and good quality office assets are exchanging hands. Several developers and owners of commercial office real estate are in various stages of preparing for the listing. Considering that the Indian office sector is quite organized and has the presence of corporate developers, it opened the way for the maiden REIT,” says Shobhit Agarwal, MD & CEO, ANAROCK Capital.

However, the COVID-19 outbreak has slowed down activity, with global investors carefully watching the emerging WFH trend that may shrink office space requirements. Developers worry about the attainable rental values for renewals and new leases, as there may be a demand slowdown in the short term. Commitments on future spaces, if withdrawn, may adversely impact the commercial office sector.

Thankfully, currently, the top 7 cities of India have around 550 mn sq ft Grade A office supply, of which 310-320 mn sq ft is REIT-able. Indian REITs are still at a nascent stage with immense potential even in other asset classes going forward, including 43 million sq ft of Grade A mall spaces sized more than 2 lakh sq. ft, 110 million sq ft Grade A warehousing stock, and residential rental housing market.

“If the residential rental housing market in India gets further organized, it is capable of emerging as a sizeable opportunity for residential REITs. Considering that residential constitutes around 80 per cent of the India real estate market, there is a huge opportunity to systematically develop rental housing and enable the formation of residential REITs,” informs Agarwal.

In addition to the above traditional asset classes, India is a booming market for ‘new-age’ asset classes such as student housing, co-living and senior living which have inherent potential to be developed as REITs, albeit it appears to be several years away as of now.