Despite COVID-19 more developers preparing for a REIT listing

The listing of two REITs and now the upcoming third one by Canadian asset manager Brookfield clearly demonstrates that there is long-term hope on commercial office market and that investors have faith in organised investment tool as compared to investing in physical real estate despite the COVID-19 pandemic.

As a matter of fact, many more developers and owners of commercial office real estate are in various stages of preparation for the REIT listing and are looking to monetise their rent-yielding commercial assets through this instrument within the next one-and-half-year, sources told Moneycontrol.

The names doing the rounds, say sources, include Bengaluru-based developer Prestige Estate and Blackstone-backed Salarpuria among others.

Also Read: Brookfield Asset Management files documents with SEBI for India’s third REIT IPO; looking to raise Rs 4,000-4,500 crore

They are looking to monetise their rent-yielding commercial assets via REITs perhaps within the next one-and-half year. Currently, the top 7 cities of India have more than 550 million sq. ft Grade A office supply, of which 310 - 320 million sq. ft. is REIT-able.

“The successful launch of India’s second REIT (Mindspace) despite the ongoing pandemic has sent out positive signals and paved the way for others to follow suit. We are witnessing consolidation of portfolios and good quality office assets are exchanging hands. Several developers and owners of commercial office real estate are in various stages of preparation for the listing,” said Anuj Puri, chairman - ANAROCK Property Consultants.

Global investment firm Brookfield Asset Management this week filed draft papers with market regulator Sebi for the initial public issue of its real estate investment trust (REIT). This would be the third REIT offering in country after the Embassy Office Parks REIT and the Mindspace REIT.

At present, this REIT has total assets of 14 million sq ft, of which 10 million sq ft is completed. Cities where it has invested are Mumbai, Gurugram, Noida and Kolkata and includes key properties like Kensington SEZ and Hiranandani Gardens, Powai. Proceeds of the fresh issue will be utilised towards partial or full pre-payment or scheduled repayment of the existing indebtedness of asset SPVs (special purpose vehicles) and for general corporate purposes.

Also Read: Will Jet Airways’ office sale to Brookfield for Rs 490 crore set a benchmark in Mumbai’s BKC?

Going forward, office as an asset class looks promising from long term perspective. There is a temporary impact due to the pandemic, however, the long-term story is good, real estate experts said.

“The very fact that the Mindspace REIT witnessed a fabulous response and Brookfield has plans to come out with their REIT demonstrates the confidence which corporates and investors have towards office assets,” Vishal Ahuja, India Head – Private Wealth Group, JLL told Moneycontrol.

The upcoming listing by Brookfield re-enforces REITs as a viable investment alternative and re-affirms the strength of the Indian commercial office real estate.

“The past two performances have also instilled confidence among investors of REITs being a viable investment option. Most importantly, it has also opened up new avenues for retail investors to own a piece of real estate by shelling out a small amount which would not have been possible otherwise,” said Anurag Mathur, CEO, Savills India.

The commercial segment continues to garner interest from both domestic and international investors. Further, Mindspace REIT listing also reflects the interest and depth of retail investor’s interest in investing in commercial real estate.

“The Mindspace listing during COVID-19 times reflects the confidence in commercial real estate, especially for Grade A Properties in Tier I cities. This is also an outcome of strong fundamentals of lower vacancies, strong collection and rental values being held on as per pre-COVID values,” Piyush Gupta, Managing Director, Capital Markets & Investment Services at Colliers International India.

What would be the impact on commercial rental values?

Vacancies in Grade A office spaces are limited. This combined with the fact that there are good number of live requirements is an indicator that the rentals will continue to remain stable.

“We have observed that, through the pandemic, rentals have remained steady as corporates are holding on to real estate occupancies. Our assessment is that it will continue to remain steady and do not expect significant movement,” said Mathur.

According to Puri, REIT-listing will not have any major direct impact on the demand and thus not even on the rental values of commercial assets. These will completely depend on market conditions and demand for office spaces. The major positive of the recent listing is that the geographical spread of the overall REIT portfolios has got widened.

Agrees Gupta. He explains that REIT has no direct impact on rental values as REIT listing is change in ownership of the assets. However, the successful listing in the current market conditions reflects that investors’ expectations on rental values is unlikely to see any kind of significant correction. In fact, there have not been any significant increase in vacancies or renegotiations or deferral of receivables, he claims.

Which are the cities that are likely to benefit?

While Embassy REIT largely focused on southern markets and the K Raheja REIT towards the western market, the Brookfield REIT has assets in the northern and eastern regions.

As per Savills India’s H1 2020 report, Mumbai, Chennai, and Pune remained more steady in terms of rentals and absorption. The other three cities - Delhi, Bengaluru, and Hyderabad witnessed a significant decline in absorption. As demand returns, markets like Hyderabad and Bengaluru will show recovery.

“From the REITs perspective, markets catering to the technology sector will return with a strong performance as technology is likely to drive the demand in the coming years,” said Mathur.

According to Colliers International India, major cities such as Mumbai, Bengaluru, Chennai, Hyderabad, Gurgaon will continue to drive demand while other cities such as Pune, Navi Mumbai, Noida, Ahmedabad, Kolkata are also likely to witness increased demand.

To sum up, the REIT launches during the pandemic clearly indicates the coming of age of Indian commercial real estate market story.

“It was a one REIT stock story until now. Launch of a REIT by one more player in August and an impending one adds to the maturing of the commercial real estate listed space. With the REIT market deepening there are clearly more avenues for larger foreign institutional players like pension, retirement funds and insurance companies to deploy long-term capital in asset backed space instruments,” said Anckur Srivasttava of GenReal Advisers.

REITs are listed entities that invest in income-generating properties and distribute at least 90 percent of their income proceeds to unit-holders through dividends. After registration with SEBI, units of REITs will have to be mandatorily listed on exchanges and traded like securities.

SEBI notified REIT's regulations in 2014, allowing setting up and listing of such trusts, which are popular in some advanced markets.