August 29, 2016

REITs as a percentage of market size are higher in India than APAC countries

Global investors are starting to look at the Indian real estate sector, especially Real Estate Investment Trusts (REITs), with greater enthusiasm than ever before. And, the current government has undertaken a number of major reforms that look set to increase the country’s appeal to foreign investors and increase capital flow.

“The penchant for development is clear from the efforts that the current government has made during the past two years or so,” says JLL’s Global CEO, Colin Dyer. “World’s leading multilateral institutions and fund managers are taking a note of this and have reposed their faith in India’s progress.”

In the Union Budget announced earlier this year, the government announced the removal of the Dividend Distribution Tax (DDT) – a major bottleneck in REITs getting listed in India. This was followed by a further relaxation of REIT norms in June, allowing them to invest more heavily in under-construction projects by rationalising unit holder consent on related party transactions and removing restrictions on special purpose vehicles (SPV) investing in other SPVs holding the assets.

The move allows commercial developers, who require funding during the under-construction stage, to receive funding through equity instead of relying on high-interest debt.

“It is also bound to enhance the REIT-compliant universe as 120 million sft of office space is under construction in India currently, which includes office space expected to be completed between 2016 and 2020, across the seven key cities,” explains Anuj Puri, Chairman and Country Head of JLL India. “Earlier, only leased office space was supposed to be considered by REITs.”

While big funds such as Blackstone, Phoenix, Brookfield, DLF and Raheja – with sizeable portfolios of quality leased/ leasable assets – were expected to launch REITs this year, Shobhit Agarwal, Managing Director of Capital Market at JLL India, expects the country’s first REIT to list in the first half of 2017.

Comparing India’s REIT market to APAC

And the potential is huge. The size of India’s REIT market is expected to compare favourably to markets across the rest of the Asia Pacific region.
Out of India’s 464 million-square-foot grade-A office space, around 25 percent – approximately US$18 billion – is expected to list by 2019. While industry expectations predict that anywhere between 25 percent and 100 percent of the total grade-A office space is expected to get listed under REITs in the country, Agarwal is of the opinion that expecting anything above 25 percent is more optimistic than realistic.

“Singapore comes closest to India’s lowest expected percentage at 19 percent, followed by Australia at 13 percent, Hong Kong at 11 percent, Malaysia at 8 percent, New Zealand at 4 percent and Japan at 3 percent,” he says.

“However, what we need to remember is that most of these APAC markets are already mature – the size of market in these countries is much higher than that of India. As the Indian REIT market matures and expands, we expect the percentage to align with that of the more mature markets.”

India REITS_August

Source: APREA

In terms of REIT market cap, India will stand around US$18 billion, even if 50 percent of the REIT-compliant office space were to get listed. This is smaller than most markets around the regions where Australia leads at US$85.15 billion followed by Japan at US$72.46 billion, Singapore at US$45.47 billion and Hong Kong at US$23.8 billion.


Shobhit Agarwal

Head of JLL’s Capital Markets team in India.

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