Nitesh Punjabi
The landscape of real estate in India has been evolving rapidly over the last decade and 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 in to 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 instituional 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 has 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 it 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 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 organised 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 lot of interest specially 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 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 organised and institutionalised. It will also help developers deliver their positions and bring equity in 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 organised 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 subscriptions for units.
The writer is General Manager- Capital Markets & Investment Services at Colliers India
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