The evolution of REIT-linked investment options in India reflects the maturity of the office market
BY: Ramesh Nair, CEO & Country Head – India, JLL
The success of the first REIT in India, Embassy Office Parks, has created the possibility that around 100 mn sq ft office space could be listed under REIT in the short to medium term out of the total REIT-worthy assets of 302 mn sq ft. The total REIT-worthy assets, which includes Embassy Office Park REIT, would translate to a potential investment of USD 38.6 billion.
per JLL Research, India’s top six cities, Delhi-NCR, Mumbai, Pune, Bengaluru,
Chennai and Hyderabad, account for a majority of the share of Grade-A office
space assets. Marquee clients occupy these offices. And India’s leading
commercial office space developers are exploring REIT listings.
strong demand for office space in 2019 adds to the market of REIT-worthy assets.
The success story of India’s first REIT
Embassy Office Parks launched
in April 2019 and heralded a new investment journey and has redefined the
growth of the sector. Its performance has put to rest all apprehensions and it
is likely to lead to the more REIT listing in the country. It has bolstered the
confidence of other developers and investors (primarily with commercial office
asset portfolio) to list their assets under REIT platform.
The Embassy Office Parks REIT has seven office parks and
four office buildings in Bengaluru, Pune and Noida with two completed and two
under-construction hotels totaling 1,096 keys. The total portfolio is of 32.6
mn sq ft comprising 24.2 mn sq ft completed and 2.9 mn sq ft under-construction
office space and proposed development area of 5.5 mn sq ft.
The REIT has registered robust numbers since
inception. Revenue from operations for 2Q FY2020 grew y-o-y by 15 percent to Rs
5,206 mn and cumulatively grew y-o-y by 17 percent for 1H FY202. Net operating income
for 2Q FY2020 grew y-o-y by 16 percent to Rs 4,384 mn and cumulatively grew
y-o-y by 18 percent for 1H FY2020. Net operating income margin for 2Q FY2020
and 1H FY2020 stood at 84 percent.
For the reasons above, Embassy
Office Parks’ REIT is currently trading at a premium of 37 per cent to its
allotted price as on November 25, 2019. This performance, during adverse market
conditions, is likely to attract more retail and global investors.
parks REIT: 37% returns since listing on April 1, 2019
What we may witness in future?
For instance, Bengaluru-based Prestige Group has 11 million sq ft of rent
yielding assets and nearly 15 million sq ft of under-construction office
assets. As per market reports, there are strong indications of Blackstone Group
and K Raheja Corp listing their jointly-owned 20 million sq ft commercial
portfolio through REIT. Together, these players would account for almost 50 percent
of the potentially upcoming REIT universe. As per publically available news reports,
other players who are also considering REIT listings include Bengaluru-based
RMZ Corp, Mumbai-based Godrej Properties and Pune-based Panchshil Realty.
Key trends that will guide the growth of REIT in India
The success of Embassy REIT
brings to the forefront some of the key trends that will influence the growth
of REITs in India.
With the success of the first
REIT, subsequent listings are expected to make a gradual start in India in line
with global trends. Several positive factors such as progressive policies,
smaller lot size, tax efficiency, strong investor interest
and presence of global investors will work in favour of REIT listings in
A strong demand-supply
condition in the office market would also drive the return of REITs. However,
any impediment to the supply pipeline will impact the REIT listings too.
Limited knowledge and
awareness of the new product are one of the biggest hurdles in front of fund
managers. Moreover, investors have not even seen a full year of the run for the
first REIT. Compared to this, they already have multiple alternate investment
options across other asset class to look at within the ambit of the capital
Since REITs are listed on the NSE
and BSE, trends in the equity markets will influence the return expectations of
retail investors looking at REITs market. As a result, like any other
market-linked investment option, retail investors have to be told about the
office space is expected to dominate the REITs market due to its robust growth,
resulting in rising rental yields and steady rise in capital values. Despite certain challenges in terms of investor
awareness about the product currently, interest is expected to increase over
The growth of REIT listings in
India will ensure more transparency and maturity due to the mandatory regulation
over property valuation, regular updates, research coverage and disclosures
relating to assets managed by REIT.Developers
with a commercial asset portfolio can use this option to reduce their debt from
proceeds received by listing their assets through REIT. Though the growth in the
REIT market in India has been gradual, we can expect it to pick up
significantly going forward.
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