In over a year since its launch, the Embassy Office Parks REIT has yielded 14 percent returns, which is higher than the returns generated by BSE Realty Index, which yielded negative returns of -20 percent in the same period, a report has said.
However, the COVID-19 outbreak has slowed down activity, with global investors carefully watching the emerging work-from-home 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 Commitments on future spaces, if withdrawn, may adversely impact the commercial office sector, according to property consultant Anarock. Embassy Office Parks is still the only publicly-traded Indian REIT with a market capitalization of approximately 3.45 billion dollars or 17 percent of listed RE market capitalization in India, the report said.
With another realty major K Raheja Corp now gearing up to announce their REIT listing, India is better positioned than ever before and there is considerable incentive for making the proposition even more attractive. Currently, the top 7 cities of India have close to 550 million sq ft Grade A office supply, of which 310 - 320 million sq. ft. is REIT-able. Indian REITs are still at a nascent stage with immense potential even in other asset classes going forward.
As much as 43 million sq ft of Grade A mall spaces sized more than 2 lakh sq. ft., excluding stand-alone anchors, have been added across the top 7 cities of India in the last decade. These malls, with an overall occupancy of more than 80%, can potentially provide a major retail REIT opportunity. Much depends on how the COVID-19 situation evolves, it said.
As of 2019, 110 million sq ft Grade A warehousing stock existed across India. 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 percent of the India real estate market, there is a huge opportunity to systematically develop rental housing and enable the formation of residential REITs. “Retail and warehousing REITs may come next; India’s first residential REIT still a long way off,” said Shobhit Agarwal, MD & CEO – ANAROCK Capital. The consultant said that India's maiden REIT has paved the way for many others to follow suit. "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," he said.
At a recent webinar on Investing in India REITs and Trends in APAC, Roberto Versace, managing director, head of listed real estate, Asia Pacific, APG Asset Management Asia said that there was interest for REITs. Liquidity flow has been unprecedented. Flow to logistics have been strong and consumer facing has been beaten up. “Interest in the sector has increased due to 10 years of quantitative easing. Cost of equity and low debt cost makes the REIT structure ideal for acquisitions,” he said last week. Ankur Gupta, managing partner, head, India Real Estate, Brookfield Asset Management said that investment grade real estate in India is around 16 trillion dollars and REIT is worth 5-6 trillion dollar by enterprise.
Jan Willem van Kranenburg, Senior Analyst European Real Estate Securities, Cohen and Steers said that Indian REITs looks attractive in the current low interest rate environment though only supply of REIT is limited. There would be some additional demand from de-densification. Higher digitisation will lead to more demand for India IT ITES. The supply side will get constrained, said Michael Holland, CEO, Embassy REIT. S Naren, chief investment officer, ICICI Prudential Mutual Fund noted that due to Covid-19 there is now some scepticism and hence the space looks more interesting from a value perspective. “Interest rates has fallen, so getting 8 percent return from fixed income is not possible and people will need to invest in REITs. We are set for very good investment cycle and Indian Investors will invest in REITs when interest rates are low,” Naren added.
REITs were introduced in India only recently, and currently focus only on commercial offices. However, they have existed globally for around 60 years. SEBI introduced draft rules, partnered with several stakeholders, and enacted the REIT regulations in 2014. Between 2014 and 2016, the rules were revised several times to address concerns, primarily related to double taxation. In 2019, US REITs market capitalization was 96 percent of the real estate market; Singapore and Japan with 55 percent and 51 percent.