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The REIT way to play realty

The success of the first listed REIT points to its potential as an investment in the commercial real estate space for serious players.

, ET Bureau|
Last Updated: Dec 23, 2019, 08.17 AM IST
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ET Intelligence Group: Real estate investment trusts (REITs) can be an investment option for those seeking exposure to the realty sector amid lower demand and liquidity issues.

Consider this. Embassy Office Parks, India's first listed REIT, has gained 50% since listing in March 2019 as against a 10% gain in the Nifty Realty Index and 5% return of the benchmark Nifty 50.

Globally, the share of REITs in the overall real estate investment is quite significant. For instance, REITs—which were launched in the US in 1961—constitute 96% of the real estate sector’s total market capitalisation today.

In other markets such as Singapore, Japan and Malaysia, where REITs were introduced over the past two decades, they account for 55%, 51% and 42% of the total real estate market cap respectively.

In India, however, the share of REITs is just over 15%.

“Global investors have had their sights set on India’s burgeoning commercial real estate market for some time,” said Shobhit Agarwal, CEO at Anarock Capital. “With the success of the Blackstone-Embassy REIT, a positive signal has gone out to global investors to stake their claim. At the same time, REITs have opened new investment avenues for domestic retail investors.”

Agarwal said the success of REITs in India could have an overarching effect on the entire real estate sector.

Of the total capital flows into the sector over the last five years, 70% has gone into rent-yielding assets. According to research by CRISIL, JLL, ANAROCK Capital and JM Financial, the Indian REIT market may grow to $22-40 billion over the next few years.

“With the underlying commercial office space growing at 18% annually over the past 19 years along with rent escalation (generally 5% every year), we still have one of the lowest rental rates, office space and capital values across major global cities,” said Suhas Harinarayanan, real estate analyst with JM Financial. “We believe the demand for grade A commercial real estate remains a secular trend and REITs offer the best way to play the theme.”

REITs are expected to become a key source of funding for Indian real estate companies. Some of the leading companies have plans to tap this source. Bengaluru-based developer Prestige Estates has created a REIT-ready structure with an expected REIT launch next year. Mumbai-based realtors Oberoi Realty and Godrej Properties, too, have proposed plans to launch REITs covering rent yielding assets.

REITs are a great investment avenue not only for institutional investors but also for retail investors, who find it difficult to invest in the commercial real estate, which has a better rent yielding than residential properties. Unlike other equity investments, REITs provide assured returns to the investors through a compulsory dividend distribution policy. REITs are mandated to distribute 90% of their net distributable income as dividend. There is also a further upside potential for the investors from periodic property valuations.

In India, the regulatory framework will play a crucial role in the success of REITs. At present, taxes such as capital gains tax are not conducive to attracting investors in large numbers. Mature markets such as the UK have exempted REITs from income and capital gains tax on the property rental business. In other countries, there have been exemptions from stamp duty as well.

The factors that may curb the growth of REITs in India include the high level of compliance and stringent regulatory requirements. In addition, the domestic real estate market is known to be less transparent with lack of clarity on property deals and complex holding structures of companies. No wonder, since its introduction in 2014 by Sebi, it took five years for the first Indian REIT to launch.



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