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India’s first REIT is here. Now for the way forward

A look at how Real-Estate Investment Trusts could impact the realty segment, and your investment outlays.

real estate Updated: Mar 30, 2019 17:22 IST
Aishwarya Iyer
Aishwarya Iyer
Hindustan Times
REIT,Real-estate investment trust,Embassy Group
(iStock)

The country’s first real-estate investment trust (REIT) was launched last week by Embassy Group, a real-estate developer, backed by Blackstone, a global investment company.

The instrument has been a long time coming. The idea of REITs in India was first mooted in 2007, with draft guidelines issued by the Security and Exchange Board of India (SEBI). The global economic downturn of 2008 combined with confusion over tax norms acted as the first setback. Between 2014 and 2016, guidelines were revised a number of times to address concerns, primarily over double taxation. In November 2016, SEBI released a final set of norms.

The good news is that REITs in the office space segment are likely to get off to a good start. “Companies are looking to expand their domestic footprint over the next two years. This augurs well for the future of office space demand in the country, and for the REITs investing in this segment,” says Vamshi Nakirekanti, executive director and head of valuation services at the real-estate research firm CBRE India.

The not-so-good news is that residential real estate, the sector in greatest need of institutional funding, is not currently included under REITs.

“This is obviously not without good reason,” says Shobhit Agarwal, MD and CEO of realty consultancy Anarock Capital. “Lack of a sound rental policy in India is one of the major hurdles. Unlike India, countries like Singapore and the US have a defined rental policy and clear circle rental rates, which makes it easier for them to host residential REITs. The government fixes a certain rental rate for each area based on which renters can take up housing. In India, there are no such fixed rates, which would make REITs hard to manage.”

RISK ASSESSMENT

The structure of REITs is similar to that of mutual funds; they invest, manage and operate property portfolios that generate regular revenue. The value of REITs can fluctuate depending on market sentiments. In India, REITs can invest in offices, malls, hotels and commercial spaces.

A major touchpoint will be the quality of tenants (blue-chip MNCs like IBM, Microsoft and Google are considered a sound bet) to ensure stability of rentals and therefore returns to the REIT; supply outlook on the cities will be crucial too. If there is oversupply or a bubble in micro-markets where the REIT properties are located, that could pose a risk.

WHAT IS A REIT?
  • Real Estate Investment Trusts (REITs) are alternative investment instruments that allow individuals to invest in commercial real-estate assets indirectly.
  • A REIT can own or manage assets as a part of its portfolio and functions on the lines of a stock. In this setup, investors serve as shareholders.
  • The minimum subscription in a REIT currently stands at Rs 50,000. Previously, it was Rs 2 lakh.

“If REITs properties are located in different cities and not just in one or two cities, that would mean a lower concentration risk for the REIT investor,” says Somy Thomas, managing director for valuation and advisory and co-head for capital markets at Cushman & Wakefield India.

“REITs are a good instrument for portfolio diversification. Rentals from the underlying asset are generally stable but, unlike bonds, REITs give you capital appreciation,” says Arvind Nandan, executive director for research at realty advisory Knight Frank India.

The market must remain vigilant too, cautions Agarwal of Anarock. “If supply of investment-grade office spaces does not keep pace with demand, we could see an asset bubble form in the short-to-mid-term.”

First Published: Mar 30, 2019 17:22 IST