Moneycontrol
Last Updated : | Source: Moneycontrol.com

'India bright spot for investments in REITs but challenge of pricing the asset right remains'

The report further says there is still a high demand for a legitimate institutionalised investment opportunity at the retail level, which may persuade investors to pay up for REIT at higher levels.

After several years of speculation, India seems primed to launch its maiden real estate investment trusts or REITs early next year. However, the challenge for REITs is no longer on possible regulatory logjam but rather on how to price the assets at a level that will appeal to both sponsors as well as REIT investors, says a study by PwC and Urban Land Institute titled  Emerging Trends in Real Estate Asia Pacific 2018. 

India remains the real bright spot. Despite endur­ing cynicism that India’s suffocating bureaucracy would effectively snuff out the chances of any early introduction of the country’s first REITs, there now seems a real prospect that India’s maiden REIT will be listed by the end of the first quarter of 2018,” says the study.

The remaining problem for REITs in India, therefore, appears no longer to be a regulatory logjam, but rather the question of how to price real estate assets at a level that will appeal to both sponsors and REIT shareholders.

It noted that REITs in Japan and Australia and Singapore are trading at yields that are about 370 to 450 basis points above their ten-year government bonds. And India’s ten-year govern­ment bond now is at about 6.6 to 6.7 percent, so arguably the trading yield of the REIT should be at least 300 to 400 basis points above that.

But from the perspective of the developer or the issuer or the sponsor, the question is: ‘Why do I have to go through a REIT to get that kind of return when I can sell the assets into the market and get better prices?’ There are pros­pects for growth, of course, but the question then becomes where do you draw the line? says the study.

The report further says there is still a high demand for a legitimate institutionalised investment opportunity at the retail level, which may persuade investors to pay up for REIT at higher levels.

“Demand in India for a legitimate institu­tionalised investment opportunity at the retail level is very high, and may persuade investors to pay up for REIT shares at higher levels,” says the study.

According to a consultant: “Indian stock markets today are currently at an all-time high, with every single new recent IPO subscribed many times over. So, I think from a financial market perspective, Indian markets would be willing to pay a decent price. Then the Indian domestic story is also very strong—lots of money coming from the Indian middle class is finding its way to the stock market. So, with real estate direct investments currently looking very stark on the residential side, and in the absence of quality investment alternatives, I think it’s very likely that people would consider investing into the office space through the REIT route as a viable option, even if it’s expensive by industry norms,” the study quoted the consultant as saying.
First Published on Nov 27, 2017 01:13 pm
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