REITs offering new opportunities for Indian developers and investors

Indian real estate sector has been rapidly evolving over the last decade and half. Formerly, commercial buildings in India used to be primarily designed with small floor plates, and single buildings without much facilities.

The strata in these buildings were sold to investors/occupiers, who then rented out them to clients. As there were multiple landlords, maintenance was a big issue leading to low quality of the buildings.

In the early 2000’s, several global multinationals have started coming to India or have signed up for captive process centers due to the IT boom. These international companies started creating a major demand for high quality office spaces comprising large floor plates and high specifications.

Having large size requirements of many thousands or sometimes lacs of square feet, these companies looked-for a single landlord to deal with. Owing to this high demand, Indian developers started developing world class office spaces for possession by large clients in different sectors such as IT, BFSI and others.

Being highly capital intensive, the only way to cash out these asset class buildings as either to sell them out in full to a large institutional investor or increase debt capital via the rental discounting route. In this scenario, lack of capital led to developers either exiting current buildings to create new ones or had to increase their leverage.

These developers have received an opportunity through REITs, to retain these assets and partly cash out from them in order to help them create new Grade A office space. Moreover, small retail investors could participate in the growth of this asset class via REITs.

As REITs will be well audited, office space business in India will be more institutionalized. Moreover, developers will have to maintain these assets, retaining its valuation.

At present, many large institutions, such as Blackstone, GIC, and Brookfield, have created multi million square feet portfolios through large developers. For the benefit of partly cashing out and creating new assets, these portfolios will be listed on REITs.

In order to partly cash out today, investments from these institutions has also benefited large developers such as Embassy in Bangalore, KRC in Mumbai, and DLF in NCR, for growth of their larger portfolio.

Other assets which are rent yielding will also be benefitted from REITs. Moreover, it will also benefit retail mall assets, which are high capital-intensive businesses, in the similar fashion. Since developers are investing high capital in malls, they are unable to create further assets. However, REITs will be bring in that liquidity as well in the mall sector.

Today, the newest asset class that is under development is the industrial and warehousing asset class. Until sometime back both of these asset classes were not organised. In case when a company wished to lease space in this asset class it had to deal with local landlords and compromise with poor infrastructure and asset quality.

Developers today are looking to create industrial hubs with large layouts. Keeping their focus on operations, several companies now do not want invest in land and building. In fact, they wish to lease their factories.

After the ‘Make in India’ initiative, this asset class has been witnessing lot of interest.  The warehousing asset class has also been receiving large interest from both developers and investors, post Goods and Services Tax (GST). Moreover, this class is bound to create good rental revenue streams for developers.

Developers with the help of RIETs will be able to partly liquidate this asset class and create a larger portfolio. Since industrial and warehousing assets class is still in its growth stage, there is large potential for REITs in this asset class.

In India, REITs is a welcome move. It will help the income yielding asset class to get organised and institutionalised. Moreover, it will also assist developers in delivering their positions and bring equity in the system. As retail investors will be able to invest in such asset classes, they will also get a pie of them.

REIRs has a potential in many other real estate asset classes like schools, hospitals, among others. However, these asset classes are not yet well organised with large sizes. Besides, the ownership of these assets now is separated with multiple landlords in small pieces. Although there is a potential, these asset classes will need consolidation before they can be REITed.

In India, we must soon see the REIT listing happening for some of the office assets, a warm welcome from the Indian capital markets, as well as a large scale subscriptions for units.