Since their launch in April 2019, Indian REITs (Real Estate Investment Trusts) have paved the way for retail investors to participate in the commercial real estate sector. Over time, they have emerged as one of the most viable investment alternatives, outperforming other financial products. REIT has outperformed BSE Sensex, the Realty Index and a majority of small, mid and large-cap mutual funds. Despite the pandemic, neither the Embassy Office Parks REIT nor the Mindspace Business Parks REIT ever traded below their issue price. Even the Brookfield India REIT has recovered exceptionally well in the last six months.
Embassy Office Parks REIT, for instance, has witnessed an appreciation of around 8% (as in July 2020), and reached an appreciation of around 50% before the onset of the COVID-19 pandemic. Meanwhile, BSE Sensex and BSE Realty Index registered negative returns at -5% and in the same period. They also continued giving positive returns this year, even as other stable investment options remained uncertain or loss-making in the wake of the pandemic. The Net Operating Income for first half of financial year 2022 (H1 FY2022) has shown year-on-year (y-o-y) growth of 18% for Embassy and over 9% for Mindspace. Another important movement has been the inclusion of REITs in some of the popular Nifty indices since October 1, 2021.
The REIT market opens the door to small and medium investors, and takes away almost all the concerns of the commercial market. It enables investors with returns through stable rent-yielding cash flows. Now, as the country’s commercial real estate sector emerges from the negative effects of the pandemic, here is our outlook for REITs:
India REIT: In 2022 and beyond
A crucial factor that helps maintain a positive outlook for REITs is the inherent strength of commercial real estate in the country. India has approximately 650 million sq.ft. of Grade A office space, of which 310-320 million sq.ft. is REIT-able stock. The current 3 REITs cover 87 million sq.ft. – Mindspace 31 million sq.ft, Embassy 42 million sq.ft. and Brookfield 14 million sq.ft.
As the commercial office market bounces back, there is potential for more stock getting added to the existing REITs or the listing of new REITs. In the last one year, Blackstone and Brookfield have added about 30 million sq.ft. through acquisition of select portfolios from Prestige and RMZ, respectively.
REITs offer the post-tax returns twice as much as fixed deposits, recurring deposits, government bonds and other classes. Further, the liberalisation of regulations over the last decade also helped open up the Indian real estate market to permit FDI in real estate. This has made investing in India REITs more compelling.
The result is that 310-320 million sq.ft., which is about 50% of Grade A/B office stock, is taken by only 10 institutions. This percentage will increase as these firms are taking up majority of the future office supply. We are also seeing some consolidation and re-strategizing within these 10 institutions.
In such a scenario, SEBI’s announcement of reducing the minimum application value will make REITs a more viable option for retail investors. To further close the gap between big and small investors, SEBI also announced a reduction in the number of trading units required.
REITs can also now raise money through the bond market. This will enable more developers to take the REIT route for raising money for their projects rather than being solely dependent on debt instruments. In turn, this will enhance investor trust as developers will now need to comply with SEBI.
With these announcements, SEBI has helped encourage more investors who were on the fence, to enter the market. The increase in retail investor participation, in future, will reduce the percentage for institutional allotment. Thereby, reducing the volatility in the commercial real estate market.
With the GDP forecasts indicating 8-9% growth, the commercial real estate sector will bounce back strongly. REITs are then likely to have an accelerated entry into the market. This will lead to a win-win situation for all. The occupiers will get better quality and managed buildings and investors will get a choice of REITs across asset classes. There will also be much greater transparency in the market.
REITs braved strong headwinds in the second wave, they will do the same thing going ahead. Their portfolio occupancies are above 80% and the WALE (weighted average lease expiry) are around seven years. So, the risk of high vacancies at their portfolio levels is lower.
While there may not be any new REIT launches this FY22, existing REITs will continue to perform well.Finally, there is no denying that REIT could have its own challenges, a professionally managed and publicly traded REIT presents tremendous opportunity and growth to all classes of investors.