How SEBI’s new norms for REITs will make them a preferred investment option for small investors

The future of real estate will be characterised by an increase in smaller investments. Even before the pandemic, new and smaller retail investors were looking for affordable options in the light of rising real estate prices. This interest in smaller investments has been exacerbated by the pandemic.

At such a time, the Securities and Exchange Board of India (SEBI) has reduced the minimum application value for Real Estate Investment Trusts (REITs) to Rs 10,000 to 15,000 from Rs 50,000, a decision that’s likely to open the market for many small and retail investors.

India had its first REIT listing in early 2019. Since then, REITs have emerged as one of the most viable investment options. Even as returns from some other stable investment avenues remain uncertain in the wake of COVID-19, REITs continue to perform well because 80 percent of their underlying assets need to be operational and income-generating.

Once the office market emerges out of the pandemic, it is likely to be lucrative as ever. While there may be some pressure on rental cashflows in the short term, given that India continues to be a top global IT outsourcing destination, office real estate will continue to be a resilient, low-risk and high-return asset class. REITs then will gain as much preference as equities or mutual funds or more as a much safer investment option.

One critical factor that helps to maintain a positive outlook for REITs is the inherent strength of commercial real estate in the country. About 50 percent of Grade A office space is REIT-able stock, and office stock is set to touch 1 billion square feet in six to eight years. We can expect almost 100 million sq. ft. of space to be listed on the Indian stock exchanges in the next two years.

Liberalisation of regulations over the past decade has helped open up the Indian real estate market to permit FDI in real estate. This made investing in Indian REITs more compelling. Across the major cities in India, 50 percent of Grade A/B office stock, which is about 600 million sq. ft., is owned by about 10 institutions and landlords, some of which are family owned, while others are with MNC landlords, and a few are in REITs.

This percentage would increase as these firms with access to expertise and capital are taking up future office development. We may see some consolidation within these 10 institutions as well.

In such a scenario, SEBI’s decision to cut the minimum application value will make REITs a more viable option for small and retail investors. To help close the gap between small investors and big institutions, SEBI also reduced the number of minimum trading units required.

Additionally, REITs can now raise money through the bond market. More developers will take the REIT route to raise money rather than be solely dependent on traditional debt instruments. This will enhance investor trust as developers will now also need to be compliant with SEBI and RERA (Real Estate (Regulation and Development) Act).

The bottom line is that real estate owners and investors expect many potential long-term effects of the COVID-19 outbreak on the real estate market. With the announcements, SEBI has helped encourage more investors who were on the fence to enter the market. The increase in retail investor participation will reduce the percentage for institutional allotment, thereby reducing volatility in the commercial real estate market.