REITs bring hopes to cash-strapped Indian real estate

New Delhi: The launch of India’s first Real Estate Investment Trust (REIT) and its initial public offering last week has come as a positive move for the cash-starved Indian real estate sector.

The IPO of Embassy Office Parks REIT, India’s first REIT to be listed, was fully subscribed on Wednesday, the last day of the three-day initial share sale, according to data on the stock exchanges. Embassy Office Parks is a joint venture between Embassy Group and private equity firm Blackstone Group.

The ‘Embassy REIT’ IPO was oversubscribed on Wednesday after the issue of up to 158 million units at a price of Rs 300 per unit aggregating up to Rs 4,750 crore. The key stakeholders of the ‘Embassy REIT’ includes Axis Bank, as the trustee, Embassy Office Parks, the manager, and Embassy and Blackstone as the sponsors.

A REIT by definition is “any corporation, trust or association that acts as an investment agent specializing in real estate and real estate mortgages” under the US Internal Revenue Code. REITs are securities that are traded on stock exchanges.

Rushabh Vora, Director of SILA, a real estate management firm said: “For someone new to investing, a REIT works like a mutual fund. The underlying asset in the REIT is real estate, such as a building or commercial property, whereas the underlying asset for a mutual fund is the share of a company.”

REITs use the money that is collected from investors to buy real estate instead of using it to buy bonds or shares of company and a REIT receives rental income, known as yield from the operations or leasing of asset or development.

The net income generated from renting out the underlying assets after deduction of the cost of operating all the assets for during a given period would be the profit from the REIT. The costs typically include those of running the facilities, utilities, leasing, marketing, the fees paid to the REIT managers and trustees.

In India, REIT is allowed only for the commercial real estate sector.

Speaking of the success of the first REIT IPO and its impact on the market Shishir Baijal, Chairman and Managing Director, Knight Frank India said: “The listing of India’s first REITs was one of the most awaited events for the real estate sector as it has taken over a decade and half to come to fruition. The over subscription of REITs is, therefore, a very encouraging sign for the real estate sector at large and specially for the commercial segment.”

The positive response to the REIT will help build further confidence amongst global investors and attract them to consider India along with its global peers such as Singapore and Hong Kong, he added.

Amit Wadhwani, Co-founder, Sai Estate Consultants said that the over-subscription of the Blackstone-Embassy REIT means that the consumer and the retail investor confident of buying back in the commercial real estate in the country.

Globally, REITs have proved to be a viable choice for alternative investments in several Asian countries over the past decade and it presents an attractive proposition for global investors to invest here and benefit from it, according to House of Hiranandani’s Director, Surendra Hiranandani.

The investment tool is likely to “propel a new wave of market activity with greater availability of funds and investments in the country’s real estate sector”, he noted.

REITs are likely to fuel demand for office spaces from sectors like logistics, manufacturing and consumer goods, besides IT, IT-enabled services and the banking and financial services institutioins. Markets like Bangalore and Chennai can gain further traction owing to fair pricing and growth of IT companies, Hirandani said.

For a sector, facing acute financial crisis, REIT may ease the stress to some extent, analysts said. Further, it will make real estate and a better investment platform, a much more beneficial prospect for the long run.

“Improved investor sentiments in office assets is likely to generate a potential fundraising avenue for developers and also propel major corporations to lease or purchase space in quality buildings,” said Anshuman Magazine, Chairman, India, South-east Asia, Middle East and Africa for CBRE.

He further said, while the office sector is expected to dominate REIT listings initially, it is expected to be followed by retail and logistics sector in the long-run, thereby opening up avenues for the real estate sector at large.

Experts, however say interest in investing through this tool would depend upon the dividends and returns. Investors will be looking at returns after tax in dividends and subsequent capital gains.