India’s Real Estate Investment Trust (REIT) market is entering a phase of sustained growth with more listings and a broader spectrum of buyers and sellers, which will increase liquidity and incentives to securitise property assets, according to a report by JLL, a global real estate services firm.
It said office markets across seven major cities have the potential space of 284 million sq ft that could be securitised at an estimated value of Rs 262,800 crore ($36 billion), with Bengaluru leading being the biggest source with 31 percent of REIT-worthy assets.
In 2020, office space led the pack among asset classes in India, with transactions reaching $ 3.1 billion, underscoring its importance to future REIT listings in India, it said.
“The continued success of listed REITs in India can be attributed to sponsor quality, track record and ability to stay transparent and deliver predicable returns," said Samantak Das, Chief Economist and Head Research & REIS, JLL India.
The estimate was based on buildings that meet two important criteria - single ownership and large floor space with high occupancy rate.
Bengaluru, with large IT spaces housing global occupiers, will be the most favoured market for newly listed REITs as most assets are singly owned by developers or large funds, allowing the aggregation of assets into managed structures.
The forecast for more listings follows the successful launch of India’s third sponsored REIT in early 2021. Since the first India REIT was listed in 2019, a framework for improved liquidity, transparency, and corporate governance was created for REITs to thrive.
“India’s REIT evolution has been both rapid and revolutionary for the real estate sector. The fact that the closing of transactions was made possible even amidst a pandemic has demonstrated the maturity of the market and transformed India’s real estate corporate finance landscape and market liquidity. Furthermore, we are encouraged by the larger domestic institutional investor participation in the more recent listings and the emergence of a public private arbitrage play welcomed by all investors in the market,” says Priyank Shah, Director, Capital Markets, Asia Pacific, JLL.
There are opportunities for institutional investors to participate in this structural theme, potentially by assembling complementary portfolios for securitisation into REITs, or co-investing with existing platforms pre-IPO. Despite challenging socio-economic environment, the current REIT framework in India as compared to other mature markets, have already set the stage for continued success for the sector.
These include the quality of sponsors, their market experience and relationships within the Indian real estate eco-system and the quality of the first REIT portfolios, including the high-quality tenant profiles, lease expiry profiles and diversity of assets.
Several factors have given investors and regulators more confidence in the REIT space's future in 2021 and into the future. The first two listed REITs' healthy performance lowered the marginal cost of capital for Indian real estate. Additionally, REIT sponsors successfully recycled capital post-listing through asset divestments and rationalisation of their equity stakes, which raised institutional groups’ confidence to acquire larger portfolios.
REITs are listed entities that invest in income-generating properties and distribute at least 90 percent of their income proceeds to unit-holders through dividends. After registration with SEBI, units of REITs will have to be mandatorily listed on exchanges and traded like securities. The first two REITs launched in the country were from the Embassy Group and K Raheja Corp followed by the Brookfield REIT this year.
SEBI notified REIT's regulations in 2014, allowing setting up and listing of such trusts, which are popular in some advanced markets.