REITs move closer to reality

The much-awaited REIT (Real Estate Investment Trust) listing is inching closer to reality. As an investment vehicle REITs have a huge potential for the Indian market. According to ‘REIT-able Space in India: A Closer Reality’ — a  report released this week  by KPMG, NAREDCO, Hariani & Co. and Knight Frank the growth of REIT s will benefit from a large portfolio of completed commercial real estate and conducive investment climate.

The RBI has granted permission for foreign investment and ECB in REIT, which shall channelise overseas investment into India and shall provide low cost funds to cash strapped real estate sector in India

Budget 2017, too, pronounced certain direct tax proposals for the real estate sector albeit a miss on aspects such as ‘pass through’ regime to Hold Co Structure under REIT, including LLP in the definition of ‘SPV’ (Special Purpose Vehicle) etc. Appropriate representations should be made before the Finance Ministry to consider the same for removing road blocks and making REIT structure successful in India

Commenting on the report, Rajeev Bairathi, Executive Director & Head – Capital Markets, Knight Frank India said, “REITs may prove to be a game changer for Indian Real Estate Industry. Creation of broader public markets for any asset class brings in transparency and discovery of fair pricing; REIT would serve this purpose for commercial real estate assets in the country. While, on one hand, it would help developers unlock value from their leased out assets and generate much needed capital; it would also provide a much needed entry and exit vehicle for the global institutional investors looking to invest in non-residential real estate assets in India.”

According to Ameet Hariani, Founding & Managing Partner, Hariani & Co. REIT’s will provide easy liquidity to developers and investors. “Developers divesting through REITs can get in and out of developments quickly. Investors can also make lower ticket investments in property through REITs”, he said. 

Terming the new regulations as pathbreaking Neeraj Bansal, Partner and Head – ASEAN Corridor and Real Estate Sector, KPMG India, said, “REITs regulations have come a long way since the first draft of regulations was introduced by SEBI in 2008. The new regulations have significantly bridged the gap between Indian REITs and successful global REITs market regulation, and we may witness first listing on India REITs in coming year.”

Key Takeaways

•  India has a rent yielding office inventory to the tune of 537 mn. sq. ft. worth more than $70 billion. Warehousing, retail malls, shopping centers and school buildings to name a few comprise a massive REITable assets spread
• REITable assets may cover completed and rent-generating real estate assets. It is estimated that approximately $121 billion or 1.73 billion sq. ft. occupied CRE (Commercial Real Estate) across office, retail and warehouse segments could potentially benefit from the REIT opportunity
• In the case of office and retail, approximately 537 mn. sq. ft. and 75 mn. sq. ft. respectively is REIT-able area located in the top seven cities, namely Mumbai, NCR, Bengaluru, Chennai, Hyderabad, Kolkata and Pune. With respect to warehousing space, the all-India estimate is approximately 1127 m. sq. ft.
• Returns on equity of traded REITs fared better than returns on leading stock markets indexes globally over the past 10 years
• Five year returns for REITs was between 7 and 16% globally. With Japanese and Malaysian markets providing returns in the range of 8 to 10%, expectations from Asian economies on the rise