Indian real estate offers 294 million sq ft office assets REIT potential

Indian real estate offers 294 million sq ft office assets REIT potential

April 27, 2019 in REIT

MUMBAI | BENGALURU: Indian commercial real estate market is likely to provide 294 million sq ft of space that can be listed under Real Estate Investment Trusts (REITs) valued at $35 billion from the existing office stock, said a JLL India report.
Rising transparency levels, progressive regulations, and a robust commercial real estate market in the country have made the segment a favorite among institutional investors, who have allocated nearly $17 billion in the form of direct investments as well as through entity level investments from 2006 to 2019 in the office space.
India has already seen its first REIT listing from Embassy Group-Blackstone joint venture last month. With a portfolio of 32.6 million sq ft, the listing is also Asia’s largest in area terms of area.
“The listing of India’s first REIT heralds the institutionalisation of real estate assets and indicates enhanced maturity and professionalism in real estate market. Growing knowledge of REITs will ensure acceptability and gradual increase of interest from retail investors. We expect to see other asset classes like retail, warehousing and hospitality also offering REITable assets in the times to come,” said Ramesh Nair, CEO & Country Head, JLL India.
With 33% share of REITable space, Bengaluru will provide the highest REITable assets totalling 97.8 million sq ft, worth $10.7 billion. Mumbai follows Bengaluru with 17% share of total REITable space at 49.7 million sq ft worth $8.6 billion. Delhi-NCR and Chennai follow Mumbai both in space and value terms, the report said.
“Indian office space holds the potential to offer additional 101 million sq ft of office space for REIT from the new office completion expected during 2019-21. This could help upcoming REITs to gain from upside in rentals as well as capital appreciation,” said Samantak Das, Chief Economist and Head of Research & REIS, JLL India.
According to Das, while the strong institutional flow of funds into real estate will continue to provide initial momentum towards REITs’ growth in the country, active participation of insurance and pension funds in future will help in long term growth of the market.
With large and quality IT spaces occupied by prominent global players, Bengaluru will be the most favored city for REITable assets. Presence of single-ownership ready properties make it easier to aggregate the assets and manage them for REITs.
Emergence of new office space occupiers, continued demand from IT/ITES, global in-house centres along with the BFSI space is expected to keep office space demand robust over the next 3 years.


In India, REITs can open entryways of opportunities for developers and investors

In India, REITs can open entryways of opportunities for developers and investors

March 10, 2018 in Real Estate News, REIT

The landscape of real estate in India has been evolving rapidly over the last decade and a half. Earlier, office buildings in India used to be primarily with small floor plates and single buildings without many amenities. These buildings were strata sold to investors/occupiers. These investors then rented out space to clients. Quality of the buildings in those days was not great and maintenance was a big issue as there were multiple landlords.

Since the IT boom of the early 2000’s many global multinationals have started coming to India or have signed up for captive process centers in India. These companies majorly started creating a demand for high-quality office spaces with large floor plates and high specifications. Since they had large size requirements, running into many thousands or sometimes lacs of square feet, they needed a single landlord to deal with. With this high demand, developers in India started developing world-class office spaces and campuses for occupancy by large clients in the IT, BFSI and other sectors.

These buildings are highly capital intensive and the only way to cash out from this asset class was to either sell it out in full to a large institutional investor or raise debt capital via the rental discounting route. Lack of capital in this scenario led to developers either exiting existing buildings to create new ones or had to increase their leverage.

REITs have given the developers an opportunity to retain these assets and partly cash out from them to help them create new Grade A office space. REITs will also give the opportunity to small retail investors to participate in the growth of this asset class. With REITs coming in the office space business in India will be more institutionalized, as REITs will be well audited as well as developers will have to maintain these assets, so it retains its valuation.

Today many large institutions, such as Blackstone, GIC, Brookfield have created multi-million square feet portfolios with large developers. These portfolios will be listed on REITs for the benefit of partly cashing out and creating new assets. The investment from these institutions has also benefited large developers such as Embassy in Bangalore, KRC in Mumbai, DLF in NCR to partly cash out today for the growth of their larger portfolio.

REITs will also benefit other assets which are rent-yielding. The other asset class gaining traction in this space is retail mall assets. Malls are also high capital-intensive businesses which will benefit from REITs in a similar fashion. Due to high capital being invested in malls by developers they are unable to create further assets. REITs will bring in that liquidity in the mall sector as well.

The newest asset class that is under development today is the industrial and warehousing asset class. Until sometime back industrial and warehousing asset class was not organized and if a company wanted to lease space in this asset class it had to deal with local landlords and make do with poor infrastructure and asset quality. Today, there are developers looking at creating industrial hubs with large layouts. Many companies now want to lease their factories and not invest in land and building, but focus on operations.

This asset class is seeing a lot of interest especially after the ‘Make in India’ initiative. Post GST, the warehousing asset class has also received a large interest from developers and investors. This asset class is bound to create good rental revenue streams for developers. REITs will only help developers partly liquidate this asset class and create a larger portfolio. There is a large potential for REITs in the industrial and warehousing assets since this asset class is still in its growth stage.

REITs in India is a welcome move. It will only help the income-yielding asset class to get organized and institutionalized. It will also help developers deliver their positions and bring equity into the system. Retail investors will also get a pie of these assets, as they will be able to invest in such asset classes. There is potential for REITs in many other real estate asset classes, such as schools, hospitals, but these are not still well-organized assets with large sizes. Also, the ownership of these assets today is segregated with multiple landlords in small pieces. Though there is a potential, these asset classes will need consolidation before they can be REITed. We should soon see the REIT listing happening for some of the office assets and will get a warm welcome from the India capital markets and we should see a large scale subscription for units.

Source: Money Control

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