What’s Happening with REITs in India?

Global perception about India’s real estate market is changing, buoyed by positive market sentiments and the government’s efforts to formalize the sector – which include changes in the land acquisition act, establishment of state-level real estate regulatory authorities and easing of foreign investment norms.

As the horizons of the sector widen, there is a compelling need for additional funding mechanisms that can ensure its growth. The decision to introduce REITs in India is a critical step towards formalising the funding mechanisms prevalent in the sector.

Across Asia, REITs have proved to be a viable choice for alternative investments, with successful launches observed in several Asian countries, including Japan, Singapore, Malaysia, Thailand, Taiwan, South Korea and Hong Kong over the past decade or so. In 2017 alone, total acquisitions undertaken by REITs in APAC crossed USD$20 billion, with an approximate share of 15% in the overall commercial real estate acquisitions undertaken in the region. In the first half of 2018, REIT acquisitions touched USD$10 billion, accounting for a share of 17% in the overall investment volume in the region during the period.

In India, the introduction of REITs was first proposed in 2007, with initial draft guidelines released by the Securities and Exchange Board of India (SEBI) in December 2007. Lack of clarity on taxation norms and the global financial crisis in 2008 resulted in the idea taking a backseat over the next few years. The idea got a second lease of life in 2013 after SEBI released its second draft guidelines. From November 2016, the pace of amendments picked up as revised guidelines were released which widened the scope of REIT assets and amended the requirements from sponsors and unit holders. By January 2018, almost all concerns regarding the viability of a REIT launch had been addressed, making it an opportune time for a REIT listing.

According to the 2016 REIT guidelines, REIT assets should at least be valued at INR 500 crore, with a minimum initial offer size of INR 250 crore. At least 80% of the value of a REIT should be in completed and rent-generating real estate assets, with a lock-in period of three years from the purchase date for the sponsors. The minimum subscription amount for a unit holder is INR 2 lakh at the time of listing.

With all decks now largely cleared, India is expected to witness the launch of its much-awaited first REIT listing early next year. Large PE players have already acquired a portfolio of quality assets over the past five to six years in anticipation of a REIT listing. In September 2018, Embassy Office Parks, a joint venture of US-based equity firm Blackstone Group and Embassy Group (an Indian real estate company) filed an offer document with SEBI for INR 5,000-crore REIT issue.

Considering the scenario, the Embassy Office Parks REIT will be a closely monitored affair by both industry stakeholders and investors. A successful REIT listing could prompt other prominent asset-holding companies to issue their own offerings, thereby opening new investment avenues for investors. Further, other asset-holding firms are likely to consolidate their portfolios and the appetite for acquiring core quality assets will continue to remain high despite limited supply. Developers could also consider redevelopment of projects especially in the retail and warehousing sectors, to potentially list those assets in future REIT listings.

Initially, the office sector is likely to dominate REIT listings. Apart from office assets, retail properties fit the bill in terms of their inclusion in a REIT listing, given that several domestic factors drive the growth of the two segments. While India allows the inclusion of under-development properties in a REIT, it is imperative that the risk associated with them is mitigated by choosing assets located in prime areas.

Although the market for REITs is still at a nascent stage in India, we expect it to take up a more central role in the near future. We anticipate that REITs becoming a reality in India is likely to improve the quality of assets offered, thereby further attracting the attention of global players to invest going forward.

By Anshuman Magazine, Head of India, South East Asia, Middle East and Africa, CBRE.