The Indian Real Estate Investment Trust (REIT) market has attained significant maturity since the launch of Embassy REIT in April 2019. The regulatory environment is making REITs more accessible and relevant. Some of the significant developments in the past few months include the third REIT by Brookfield, the follow-on issue by Embassy REIT and the major debt issuance by Embassy and Mindspace.
REIT has now established itself as a strong alternative financial platform for raising funds in the real estate sector. It is changing the way commercial real estate operates. The first reet was listed only in 2019. Since then, two more REITs have been listed in the toughest trading times in the Indian markets, and many more entities are exploring alternatives. The success of REITs has generated even stronger interest from global equity/sovereign/pension funds to invest in growth assets as the exit mechanism is in place. InvITs enable developers of infrastructure assets to monetize their assets by pooling multiple properties under a single entity. These assets have long-term contracts that provide steady cash flows for 15-20 years.
Regulatory concessions for REITs and Unitholders
In June 2021, SEBI reduced the minimum investment amount in REITs to 10,000-15,000. From 50,000 This will bring REITs at par with other equity traded instruments in the market. It will also improve liquidity due to higher trading, resulting in market price discovery.
The government has allowed foreign portfolio investors to invest in debt securities issued by REITs. This is a good move for REITs in India and will open up a huge funding source and create a wider funding base for the sector. This will make REITs more attractive to large foreign investors in India and will improve investor confidence in the office sector. It also helps REITs to raise higher debt at a competitive cost.
REITs is an attractive investment option for investors looking to diversify their portfolio. The last two years have shown that REITs provides a steady return even in uncertain times. Investors can earn income through rental income from properties owned by REITs which are a) dividend income, b) interest income, c) through the sale of REIT units in the secondary market for capital and/or redemption of capital gains. can be in the form.
• REITs listed in India provide annual distribution yield returns of 6-7%
• REITs are diversified and properties are spread across key areas like Bengaluru, Mumbai, Hyderabad, NCR, Pune, etc.
• REITs can invest only in rental properties and more than 80% investment should be in completed properties
• At least 90% of the rent received from the invested properties is to be distributed to the unit holders
Fundamentals of the underlying office market are strong.
REITs has opened up a major funding source for the real estate sector. They help developers focus more on executing realty projects and give them the option to monetize their rent-yielding property and exit the property at peak valuation of the property. REITs is also raising debt from the market at attractive rates, thereby reducing the overall cost of capital. Over the years, they have been able to reduce their weighted average cost of credit from over 9% at the time of its initial issuance to around 6.5-7%. Other REITs are also planning to raise debt. This will help reset the debt portfolio efficiently and benefit the unitholders.
Overall, the REIT rules have become more investor friendly over the past two years. We are also seeing many global investors investing in office properties. They want to build a strong portfolio that is REIT ready.
Piyush Gupta, Managing Director, Capital Markets and Investment Services, Colliers India.
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