India REITs outperformed BSE Realty Index
Real Estate

India REITs outperformed BSE Realty Index

April 1, 2019, was a historic date for India as the country’s maiden REIT  was listed on the bourses. The euphoria on Dalal Street was evident with investors placing 181 million bids and the issue being oversubscribed by 2.6 times. On the day of listing, the scrip closed at Rs 314.10 per unit, up 4.7 per cent from its issue price of Rs 300 – vouchsafing that investors whole-heartedly welcomed REITs in India.

REITs were introduced in India only recently, and currently focus only on commercial offices. However, they have existed globally for around 60 years:

Across the world, some of the largest REITs own property types such as telecommunication infrastructure, industrial (distribution centres, warehouses, etc), data centres, retail malls, healthcare facilities, commercial offices, residential projects and several other assets.

As of August 2019, the US REITs market capitalisation was 96 per cent of the real estate market while in Singapore and Japan, it was 55 per cent and 51 per cent, respectively.

In comparison, in India it was only 17 per cent as of August 2019. Despite the markets being in a turmoil over the past several months – further exacerbated by the COVID-19 outbreak which impacted businesses and stock markets alike – the REIT market opportunity is still significant and also still largely untapped in India.

Some prominent global REITs

 

REIT

Property Type

Market Capitalization*

American Tower Corp

Telecommunications infrastructure

USD 109.2 Bn

Prologis

Industrial

USD 66.4 Bn

Equinix

Data centres

USD 60.7 Bn

Equity Residential

Residential apartments

USD 21.2 Bn

Boston Properties

Commercial office

USD 13.5 Bn

* as of June 26, 2020
Source: Anarock Capital

The India story

SEBI introduced draft rules, partnered with several stakeholders, and enacted the REIT regulations in 2014. Between 2014 and 2016, the rules were revised several times to address concerns, primarily related to double taxation.


In 2014, the sponsors were given a tax deferral to transfer the shares of the special purpose vehicle (SPV) to business trusts in consideration for units. Taxation was deferred until the sale of units. In 2015, minimum alternate tax (MAT) deferral was also introduced.

In 2016, the dividend distribution tax (DDT) exemption was provided at the SPV level. The fact that this makes the REIT taxable in the hands of the shareholders has caused some concern – but SEBI, along with industry stakeholders, is working to sort this out as well. The regulator has been instrumental in the success of the REIT vehicle in India, crafting a robust process and efficient mechanism to ensure transparency and generate interest from institutional investors.

Presently, Embassy Office Parks REITs is the only publicly-traded REIT in India and as of June 26, 2020, its market capitalisation was around US$ 3.45 billion (17 per cent of the listed real estate stocks’ market capitalisation in India).

Embassy Office Parks REITs - A Snapshot

Portfolio Size

33 million sq ft

Occupancy

92.8 per cent

No of Properties

7

Geographical Spread

Bengaluru, Mumbai, NCR & Pune

Average Lease Tenure

5 to 9 years

From its inception leading up to June 25, 2020, Embassy Office Parks REIT has yielded 14 per cent returns , which is higher than the returns generated by BSE Realty Index (which yielded negative returns of – 20 per cent in the same period.

India REITs market – Under-explored, opportunities galore

India’s maiden REIT has paved the way for many 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 preparing for the listing. Considering that the Indian office sector is quite organised and has the presence of corporate developers, it opened the way for the maiden REIT.

However, the COVID-19 outbreak has slowed down activity, with global investors carefully watching the emerging WFH trend that may shrink office space requirements. Developers worry about the attainable rental values for renewals and new leases, as there may be a demand slowdown in the short term. Commitments on future spaces, if withdrawn, may adversely impact the commercial office sector.

Currently, the top 7 cities of India have close to 550 million sq ft Grade-A office supply, of which 310-320 million sq ft is REIT-able. Indian REITs are still at a nascent stage with immense potential even in other asset classes going forward.

  • 43 million sq ft of Grade-A mall spaces sized more than 2 lakh sq ft, excluding stand-alone anchors, have been added across the top 7 cities of India in the last decade. These malls, with an overall occupancy of more than 80 per cent, can potentially provide a major retail REIT opportunity. Much depends on how the COVID-19 situation evolves.
  • As of 2019, 110 million sq ft Grade-A warehousing stock existed across India.
  • If the residential rental housing market in India gets further organised, it is capable of emerging as a sizeable opportunity for residential REITs. Considering that residential constitutes around 80 per cent of the India real estate market, there is a huge opportunity to systematically develop rental housing and enable the formation of residential REITs
  • In addition to the above traditional asset classes, India is a booming market for ‘new-age’ asset classes such as student housing, co-living and senior living which have inherent potential to be developed as REITs, albeit it appears to be several years away as of now.

    End note

    The successful listing of Embassy Office Parks REIT was a major step in the right direction. The realisation of a larger REIT market in India will hinge on the further benefits that markets offer to investors. With regards to capital gains tax concerns, India could consider taking cues from mature markets such as the UK (which has exempted REITs from income and gains tax.)

    With another realty major K Raheja Corp now gearing up to announce their REIT listing, India is better positioned than ever before and there is considerable incentive for making the proposition even more attractive. With the right kinds of evolutionary steps, India can join the elite club of global REITs. Establishing and nurturing such investment vehicles helps unlock the massive value of real estate assets and enable retail participation in the development of the nation.

    About the Author: Shobhit Agarwal is Managing Director & CEO at Anarock Capital.

    April 1, 2019, was a historic date for India as the country’s maiden REIT  was listed on the bourses. The euphoria on Dalal Street was evident with investors placing 181 million bids and the issue being oversubscribed by 2.6 times. On the day of listing, the scrip closed at Rs 314.10 per unit, up 4.7 per cent from its issue price of Rs 300 – vouchsafing that investors whole-heartedly welcomed REITs in India. REITs were introduced in India only recently, and currently focus only on commercial offices. However, they have existed globally for around 60 years: Across the world, some of the largest REITs own property types such as telecommunication infrastructure, industrial (distribution centres, warehouses, etc), data centres, retail malls, healthcare facilities, commercial offices, residential projects and several other assets. As of August 2019, the US REITs market capitalisation was 96 per cent of the real estate market while in Singapore and Japan, it was 55 per cent and 51 per cent, respectively. In comparison, in India it was only 17 per cent as of August 2019. Despite the markets being in a turmoil over the past several months – further exacerbated by the COVID-19 outbreak which impacted businesses and stock markets alike – the REIT market opportunity is still significant and also still largely untapped in India.Some prominent global REITs  REIT Property Type Market Capitalization* American Tower Corp Telecommunications infrastructure USD 109.2 Bn Prologis Industrial USD 66.4 Bn Equinix Data centres USD 60.7 Bn Equity Residential Residential apartments USD 21.2 Bn Boston Properties Commercial office USD 13.5 Bn * as of June 26, 2020 Source: Anarock Capital The India story SEBI introduced draft rules, partnered with several stakeholders, and enacted the REIT regulations in 2014. Between 2014 and 2016, the rules were revised several times to address concerns, primarily related to double taxation. In 2014, the sponsors were given a tax deferral to transfer the shares of the special purpose vehicle (SPV) to business trusts in consideration for units. Taxation was deferred until the sale of units. In 2015, minimum alternate tax (MAT) deferral was also introduced. In 2016, the dividend distribution tax (DDT) exemption was provided at the SPV level. The fact that this makes the REIT taxable in the hands of the shareholders has caused some concern – but SEBI, along with industry stakeholders, is working to sort this out as well. The regulator has been instrumental in the success of the REIT vehicle in India, crafting a robust process and efficient mechanism to ensure transparency and generate interest from institutional investors. Presently, Embassy Office Parks REITs is the only publicly-traded REIT in India and as of June 26, 2020, its market capitalisation was around US$ 3.45 billion (17 per cent of the listed real estate stocks’ market capitalisation in India). Embassy Office Parks REITs - A Snapshot Portfolio Size 33 million sq ft Occupancy 92.8 per cent No of Properties 7 Geographical Spread Bengaluru, Mumbai, NCR & Pune Average Lease Tenure 5 to 9 years From its inception leading up to June 25, 2020, Embassy Office Parks REIT has yielded 14 per cent returns , which is higher than the returns generated by BSE Realty Index (which yielded negative returns of – 20 per cent in the same period. India REITs market – Under-explored, opportunities galore India’s maiden REIT has paved the way for many 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 preparing for the listing. Considering that the Indian office sector is quite organised and has the presence of corporate developers, it opened the way for the maiden REIT. However, the COVID-19 outbreak has slowed down activity, with global investors carefully watching the emerging WFH trend that may shrink office space requirements. Developers worry about the attainable rental values for renewals and new leases, as there may be a demand slowdown in the short term. Commitments on future spaces, if withdrawn, may adversely impact the commercial office sector. Currently, the top 7 cities of India have close to 550 million sq ft Grade-A office supply, of which 310-320 million sq ft is REIT-able. Indian REITs are still at a nascent stage with immense potential even in other asset classes going forward. 43 million sq ft of Grade-A mall spaces sized more than 2 lakh sq ft, excluding stand-alone anchors, have been added across the top 7 cities of India in the last decade. These malls, with an overall occupancy of more than 80 per cent, can potentially provide a major retail REIT opportunity. Much depends on how the COVID-19 situation evolves. As of 2019, 110 million sq ft Grade-A warehousing stock existed across India. If the residential rental housing market in India gets further organised, it is capable of emerging as a sizeable opportunity for residential REITs. Considering that residential constitutes around 80 per cent of the India real estate market, there is a huge opportunity to systematically develop rental housing and enable the formation of residential REITsIn addition to the above traditional asset classes, India is a booming market for ‘new-age’ asset classes such as student housing, co-living and senior living which have inherent potential to be developed as REITs, albeit it appears to be several years away as of now.End note The successful listing of Embassy Office Parks REIT was a major step in the right direction. The realisation of a larger REIT market in India will hinge on the further benefits that markets offer to investors. With regards to capital gains tax concerns, India could consider taking cues from mature markets such as the UK (which has exempted REITs from income and gains tax.) With another realty major K Raheja Corp now gearing up to announce their REIT listing, India is better positioned than ever before and there is considerable incentive for making the proposition even more attractive. With the right kinds of evolutionary steps, India can join the elite club of global REITs. Establishing and nurturing such investment vehicles helps unlock the massive value of real estate assets and enable retail participation in the development of the nation. About the Author: Shobhit Agarwal is Managing Director & CEO at Anarock Capital.

    Next Story
    Building Material

    JK Lakshmi Cement posts Rs 190.24 mn loss in Q2; revenue dips 2.2%

    JK Lakshmi Cement reported a consolidated net loss of Rs 190.24 million for the second quarter ending September 30, 2024, attributing the downturn to a drop in sales realisation. This was a significant change from the previous year when the company recorded a profit of Rs 950.87 million during the same period, as indicated by JK Lakshmi Cement (JKCL), the flagship company of JK Organisation. Revenue from operations for the September quarter decreased by 2.16 per cent to Rs 12.34 billion, compared to Rs 15.74 billion in the year-ago period. Additionally, JKCL's total expenses were slightly low..

    Next Story
    Infrastructure Energy

    Epsilon partners with S Korean firm for high-capacity Li-ion batteries

    Battery material manufacturer Epsilon Advanced Materials announced that it has partnered with South Korean firm Daejoo to develop a Silicon-Graphite composite aimed at enhancing the discharge capacity of lithium-ion batteries. Under this joint initiative, the two companies have set an ambitious goal to create materials for lithium-ion batteries with a capacity of 450 - 600 mAh/g, targeting a 50 per cent increase in discharge capacity and a life span extended by thousands of cycles, according to Epsilon. As part of this collaboration, Epsilon will supply synthetic Graphite to be utilised in..

    Next Story
    Infrastructure Transport

    Govt plans next phase of airport privatisation in 2025-26 Budget

    The central government is preparing to initiate the next phase of airport privatisation and development under the public-private partnerships (PPP) model following the 2025-26 Budget, as per information from three officials familiar with the plans. According to a senior official from the Ministry of Civil Aviation, the cabinet note outlining the next phase of airport privatisation is nearly finalised and will be presented to the Ministry of Finance next week, before being forwarded for Cabinet approval. The official further indicated that the central government is keen to begin this process ..

    Hi There!

    "Now get regular updates from CW Magazine on WhatsApp!

    Join the CW WhatsApp channel for the latest news, industry events, expert insights, and project updates from the construction and infrastructure industry.

    Click the link below to join"

    +91 81086 03000