Indian REITs Poised for Increased Global Capital Inflow
Real estate markets around the world have experienced a surge in institutional investment, thanks to the rise of real estate investment trusts (REITs) and the influx of private equity, sovereign, and pension funds. These investment instruments have not only provided liquid avenues for institutional investors but have also enhanced the depth and breadth of real estate markets. In India, the public REITs market has been thriving, with over 50% of the country’s Grade A office stock deemed REITworthy. This positive trend is expected to continue, according to a recent survey by JLL.
The introduction of REIT listings in India has given retail investors a mutual fund-like investment option in real estate. In the past, retail investors faced challenges when directly investing in real estate. However, the emergence of REITs in recent years has addressed these issues by offering diversification across asset classes and geographies, smaller investment denominations, lower transaction costs, tax savings, easy liquidity, and access to professional expertise with transparency and accountability.
India took its time in establishing legislation for REITs compared to other countries, and until recently, only three office-focused REITs were listed. The first REIT, Embassy Business Park, debuted in 2019, followed by Mindspace and Brookfield in 2020. Despite being launched during the pandemic, both REITs received strong responses from institutional and retail investors. Even in the face of the pandemic, the occupancy and rent collections for REIT-managed assets remained stable, underscoring the resilience of professionally-managed assets.
The transparency, liquidity, and robust rent-yielding portfolios of Indian REITs have successfully attracted global capital, as evidenced by the previous three listings. As India’s office sector continues to drive the growth of REITs, it is crucial to introduce more investment vehicles across other asset classes such as retail, logistics, and hospitality. With policy measures supporting the growth of the public REIT market and more than half of India’s Grade A office stock considered REITworthy, the potential for further market expansion is significant.
India is on the right track to capture a larger share of global capital for its real estate markets, and additional listings are the way forward. The combined market capitalization of India’s three listed office REITs currently stands at $7 billion, accounting for 19% of the Nifty realty index companies’ market cap. The operational office stock under REITs has tripled to 74.4 million square feet as of March 31, 2023, from 24.8 million square feet on March 31, 2019.
While the technology sector clients contribute an average of 43% of rental revenue across the REIT office portfolios, there is substantial potential for the market to expand further. REITs currently hold only 9.6% of India’s Grade A office stock, leaving ample room for growth.
In addition to the office sector, other real estate asset classes such as industrial warehousing, retail malls, serviced co-working spaces, co-living spaces, and hospitality also offer stable rental yields. These asset classes are now on the radar of established REIT players.
The retail space in the top seven metros and prominent Tier-2/3 cities presents an opportunity for an additional 65-69 million square feet of potential REITworthy assets in existing malls. Given that many global funds have already partnered with key retail developers, this segment is ripe for new listings.
In summary, India’s REIT market has shown great potential, attracting both institutional and retail investors. With the success of the existing REITs and the favorable policy environment, the market is poised for further growth across various asset classes. The inclusion of retail, logistics, and hospitality sectors in the REIT market will provide more investment opportunities and expand India’s real estate market’s share of global capital.
