Real estate developers go slow on REITs

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As the first Infrastructure Investment Trust (InvIT) got listed recently, the real estate sector is yet to leverage Real Estate Investment Trusts (REITs) despite both having been conceptualised by the Securities and Exchange Board of India in 2014.

Even though players such as DLF, Blackstone, Embassy Group, K Raheja Corp, and RMZ had indicated that their REITs may become reality by mid-2017, it may still be sometime away, industry analysts and investment bankers say. They add, though, that one or two REITs might get listed by end of this year.

“The bigger and complex the portfolio is, the longer will be the time taken to list a REIT. We expect the first REIT to take shape not before the end of the calendar year.

“But having said that, the overall conditions are quite positive for REITs,” Mike Holland, CEO, Embassy Corporate Park, told BusinessLine.

Embassy Corporate Park was among few other players who filed an application with SEBI seeking an in-principle approval to register its REIT last year.

REITs are investment vehicles that can be used by real estate players to attract private investments while investors are able to get dividends generated from income-producing real estate assets such as office buildings, shopping malls, apartments, warehouses and mortgages.

‘Entry & exit vehicle’

“While on one hand REIT would help developers unlock value from their leased out assets and generate much needed capital, it would also provide a much-needed entry and exit vehicle for the global institutional investors looking to invest in non-residential real estate assets in India,” Rajeev Bairathi, ED and Head — Capital Markets, Knight Frank India, said.

“Last year has seen a considerable easing up of Indian REIT regulations — it’s time for investors, developers and owners to get in on the REIT action. It appears that, now, the REIT way is the right way,” Ameet Hariani, Founding & Managing Partner, Hariani & Co, told BusinessLine.

However, some industry sources suggest that for many real estate players meeting SEBI’s compliance and disclosure rules could still be challenging — hence, the delay in first REITs hitting the market. Industry watchers also note that capital gains tax and issues relating to stamp duty are major concern areas for prospective developers wishing to use REIT as an investment vehicle.

Market potential

It is estimated that approximately $121 billion or 1.73 billion sq ft of occupied commercial real estate across office, retail and warehouse segments could potentially benefit from the REIT opportunity. A recent KPMG, NAREDCO and Knight Frank report said India has a rent-yielding office inventory of 537 million sq ft worth more than $70 billion.

According to Grant Thornton’s Indian Real Estate Sector Annual Handbook 2017, the ready commercial space eligible for REIT investments amounts to 277 million sq ft, accounting for 44 per cent of total office stock in India. The REIT-eligible commercial office stock is estimated to have a total value of $44-53 billion. In retail assets, the estimated value of REIT-eligible stock (completed and under-construction malls) is around $20-24 billion.

“With over 100 million sq ft of Grade A commercial real estate built to international standards with marquee tenants and long lease profiles, India now has the ingredients in place for a REIT market, and the motivation for holders of these assets to look to the public markets as an option to raise capital and monetise investments,” Samarth Jagnani, an executive director in Morgan Stanley’s Global Capital Markets group, based in Mumbai, told BusinessLine.

PE inroads

However, Sandeep Singh, Senior Director — Structured Finance, India Ratings & Research, says commercial real estate in India has already attracted significant private equity interest in the last couple of years, which reduces compulsion for real estate developers to go and seek listing of a REIT, unlike in infrastructure sector.

According to PwC, the total investment made by PE funds in the real estate sector was around ₹25,680 crore in 2015, which is nearly 72 per cent higher than that recorded in the previous year and the highest ever annual investment recorded in the sector in rupee terms since 2008.