India is on the cusp of welcoming its first real estate investment trust, a potential game changer for a real estate market that is hungry for liquidity boost.
Embassy Office Parks – a joint venture of U.S. private equity firm Blackstone Group and India-based Embassy Group – is expected before the end of this year.
The group is looking to raise between US$4 billion and US$5 billion, with a portfolio that would include over 70 real estate assets in Mumbai, Bengaluru, Pune and the National Capital Region.
“The listing is a significant step in bringing an organised and structured investment mechanism in the real-estate sector,” says Ramesh Nair, CEO and Country Head, JLL India.
If the deal goes to plan, it could encourage new a swathe of REIT offerings, providing a necessary boost for Indian property firms that are struggling to access liquidity amid a raft of new government policies, Nair says. The implementation of the Goods and Services Tax (GST) in July last year, and the demonetisation of the rupee in late 2016, have spurred caution among real estate investors, affecting transactions across the country.
“With a portfolio of approximately 33 million square feet of leasable area, the Embassy-Blackstone REIT will be Asia’s largest office REIT by portfolio size. This is likely to create more incentives for institutions to take up REITs in future,” Nair says.
A journey to what lies ahead
The launch of a REIT market in India has been a long time coming. The idea was first proposed in 2007, but faced a decade of delays. By the end of 2017, SEBI simplified the rules, further allowing banks and lending institutions to invest into REITs and listed infrastructure trusts for up to 20 percent shareholding.
REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties and offer regular dividend-based returns. Invested in completed commercial properties
REITs provide an investment opportunity to retail as well as institutional investors.
Close to 314 million square feet of office space in India is viable for REITs, according to JLL data. The country’s top seven cities have more than 900 REIT-worthy properties.
“Considering the capital requirement of CRE developers and the investment avenue that REITs provide, government support of the rules are likely to further boost investments in the sector,” adds Nair. “REITs give developers an exit route. However, those stuck with other categories of properties, other than leasable commercial complexes such as land or a residential project, will still look at private equity players.”
The advent of a REIT market could have impacts on real estate markets across India, including office rentals across top cities, where most of the properties are located. “REIT listings are expected to upgrade the overall offerings of the development firms. Completed ready-to-move-in superior properties will mean premium rentals for occupiers,” Nair says.
In the short to medium term, rising interest rates could still dampen the investor sentiment. “As interest rates in the country are set to rise further, investors may witness low returns in short to medium term,” he says.
But in the long run, regular capital flow in the market through REITs will ensure that funds are being utilised in creating economic zones and business districts comprising of good quality Grade A buildings. “This will directly upgrade the overall urban infrastructure of our cities,” adds Nair.
Click to read about how Quasi-REITs are smoothing China’s transition to securitization.