Reits and Invites are an emerging asset class in India
The Indian Real Estate Investment Trust (Reit) market has reached significant maturity since the launch of Embassy Reit in April 2019. The regulatory environment makes Reits more accessible and relevant. Some significant developments in recent months include the issuance of the third Reit by Brookfield, the follow-up issue by Embassy Reit and the major debt issues by Embassy and Mindspace.
Reit has now established itself as a solid alternative financial platform for raising funds in the real estate sector. It changes the way commercial real estate works. The first Reit was only listed in 2019. Since then, two more Reit have been listed on the Indian stock exchanges in the most difficult times, and many other entities are exploring this option. Reits’ success has sparked even stronger interest from global equity / sovereign / pension funds to invest in development assets, with the exit mechanism now established. InvITs allow developers of infrastructure assets to monetize their assets by consolidating multiple assets under a single entity. These assets have long-term contracts that provide stable cash flow for 15 to 20 years.
Regulatory concessions for REITs and unitholders
In June 2021, Sebi reduced the minimum investment amount in Reits to ??10,000 to 15,000 ??50,000. This will also bring Reits to par with other equity-traded instruments in the market. It will also improve liquidity due to increased trading leading to discovery of market prices.
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 significant source of funding and create a broader funding base for the industry. It will also make Reits in India more attractive to large foreign investors and improve investor confidence in the office sector. It also helps Reits take on more debt at a competitive cost.
Mutual funds are an attractive investment option for investors looking to diversify their portfolio. The past two years have shown that Reits offer a stable return, even in times of uncertainty. Investors can earn income through rents received from properties owned by Reit, which may take the form of a) dividend income, b) interest income, c) capital redemptions and / or capital gains Through the sale of Reit shares on the secondary market.
• Investment companies listed in India offer an annualized return on distribution returns of 6-7%
• Pension funds are diversified and assets are spread across major regions such as Bengaluru, Mumbai, Hyderabad, NCR, Pune, etc.
• REITs can only invest in rental properties and more than 80% of the investment must be in completed assets.
• At least 90% of the rents received from the invested properties must be distributed to the unitholders
The underlying fundamentals of the office market are strong.
REITs have opened up an important source of financing for the real estate industry. They help developers focus more on executing real estate projects and give them the flexibility to monetize their rental asset and leave the property at its maximum valuation. REITs have also taken on debt at remunerative market rates, reducing the overall cost of capital. In recent years, they have been able to reduce their weighted average cost of debt to around 6.5-7%, down from over 9% when it was originally issued. Other Reits are also considering taking on debt. This will help reset the debt portfolio effectively and benefit unitholders.
Overall, REIT regulation has become more investor friendly over the past couple of years. We are also seeing many global investors investing in office assets. They are looking to create a strong portfolio that will be ready for the Reit.
Piyush Gupta is Managing Director, Capital Markets and Investment Services, Colliers India.
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