REIT-eligible commercial realty market in India estimated at $43-$54 billion: RICS-C&W
BENGALURU | MUMBAI: Indian commercial realty market offers investment opportunity worth $43 – $54 billion across the top 8 cities including Mumbai, Delhi-National Capital Region, Bengaluru and Pune through REIT-eligible ready stocks, said a report by RICS and Cushman & Wakefield.
Further, it is estimated that approximately 315 million sq ft of office inventory is eligible for REIT across the cities. The REIT-eligible inventory includes existing non-strata sold Grade A inventory, wherein Bengaluru, Mumbai and Delhi-NCR cumulatively account for over 67%.
The report estimates that the value of REIT-eligible stock is seen to be the highest in Bengaluru at $15.8 billion primarily due to the high volume of investible Grade developments. Mumbai with $ 14.5 billion stands second due to higher capital values of commercial properties, despite having roughly half of Bengaluru’s REIT-able stock. The estimated value of REIT -eligible stock in NCR is $11.04 billion which is the third highest.
“We have come out with the IPO guidelines for the issuance of units of INVits. On same lines, we are working on the IPO guidelines for units of REITs. Since there are no accounting standards for REITs and INVits, we have set up sub-committees looking at the financials to be brought out with the offer documents as also the continuous disclosure to be made; also set up a sub-committee for issuance of valuations, who will come out with their report,” said Ms. Barnali Mukherjee, Chief General Manager, Securities and Exchange Board of India (SEBI). “On the valuations side, a separate chapter has been included in REIT regulations where lots of rights and responsibilities have been given to the valuer who has to comply with International Valuation Standards.”
SEBI has already received 4 applications for infrastructure investment trusts (INVits), where two applications have been processed and two are registered. The capital market regulators has come out with amendments on REIT regulations to bring more clarity and make it more acceptable but as of now, it has not received any applications for REITs.
“Whatever SEBI could do has already been done, in terms of removing key roadblocks such as capital gains tax and DDT and now we are looking forward to applications for REITs so that the REIT market can take off,” Mukherjee said while delivering keynote address at RICS Real Estate Conference 2016.
Overall, the commercial office space is witnessing high pre-commitment levels in the last couple of years. Companies in sectors such as IT-ITES, Pharmaceuticals & Healthcare sectors are signing-up space for future take-up, amidst limited quality grade A supply in select locations. During the year 2015, pre-commitment levels across the top 8 cities were witnessed at 11.8 million sq ft, a 9% increase over 2014 levels; and a 71% increase from 2012 levels. In Q1 2016 alone, 4.6 msf of pre-commitment were witnessed, with Bengaluru and Hyderabad leading the way.
“Commercial real estate is expected to see continued demand, fueled by positive business sentiment (especially in IT/ITES and new age digital businesses) based on major policy reforms undertaken by the Government. There is also likely to be considerable international investor interest in income yielding assets and the first REIT’s and Invit’s are not far away. REIT’s will drive the need for Indian commercial real estate to speak the language of international investors which, in turn will create demand international standards and corporate governance; professionalism and skills – which are all the things that the RICS Stands for,” said Sachin Sandhir, Global Managing Director – Emerging Business, RICS.
Of the REIT-eligible stock across the 8 cities, Bengaluru has over 100 million sq ft of REIT-eligible stock (33% of total REIT-able stock), more than double of that of Mumbai. Approximately 75% of the total (all grades) office stock in Bengaluru is eligible for REIT investments. Delhi-NCR (56 million sq ft) and Mumbai (51 million sq ft) are expected to follow Bengaluru in terms of REIT-able stock as of Q1 2016. REITs once implemented in India would enable investors to generate a stable source of income and also earn profits by trading the units of REITs, thereby increasing the attractiveness of REITs as investing medium. With the government exempting Dividend Distribution Tax (DDT) for Special Purpose Vehicle (SPV) of REITS in the Union Budget, the investment vehicle is likely to be more attractive for investors.
“REITs can provide a huge opportunity for developers and investors in India given the potential in the Indian real estate market. REITs would help developers resolve their fund-raising issues and allow them to focus on completing their projects in a timely manner. Apart from the top 3 cities, Chennai and Pune have immense scope for REITs with approximately 34 million sq ft each of REITS-eligible stock,” Sanjay Dutt, Managing Director, India, Cushman & Wakefield said. “Going forward, by the end of 2017, Hyderabad’s REIT-able stock is expected to reach approximately 41 million sq ft. This would place Hyderabad’s REIT-able stock at 4th place, surpassing that of Chennai and Pune. With investor and occupier interests rising in Hyderabad, a high number of Grade A projects are likely to be completed enabling high REIT-able stock.”
Apart from the office sector, the retail sector too has high potential to generate rental income for investors. Since last year, private-equity firms have shown interest in investing in malls in India, indicating that there is a certain attractiveness in the retail shopping center space owing to future prospects.”
The top 8 cities have REIT-eligible mall supply of approximately 39 million sq ft, with Bengaluru, Delhi-NCR and Mumbai together accounting for about 64% of the retail inventory. Owing to the presence of large mall developers in Delhi-NCR, Mumbai and Bengaluru that operate some of the best malls in India, investors are likely to concentrate their investments in these cities. Mumbai (11 million sq ft) has the highest stock of REIT-able malls i.e. non-strata sold grade A malls followed by Delhi NCR (7.4 million sq ft) and Bengaluru (6.5 million sq ft).
The entry of higher number of foreign brands over the years would likely spur the requirement of quality malls in major cities. Going forward, there is over 25 million sq ft of malls space that is currently under construction across the eight cities and is expected to get operational by 2018. These malls would provide investors with an array of investment options in the retail asset class.