REITs make space in Indian market's investment portfolio

Mumbai: Real Estate Investment Trusts (REITs) have progressively gained popularity and have managed to make some space in the Indian market's investment portfolio. We may expect it to play a bigger role in over time, given its ability to offer high returns from both income and capital appreciation.

The Misra Centre for Financial Markets and Economy, IIM Ahmedabad, a unique centre for applied research on Indian financial markets and economy, recently hosted a panel discussion on REITs: "Surviving the Pandemic and the Way Forward," which provided insights from industry experts on how REITs as a distinct asset class have evolved globally and how they have managed to outperform despite the pandemic. The session was co-hosted by Prashant Das (Associate Professor, IIM Ahmedabad) and Vivek Sah (Director – Lied Centre for Real Estate, UNLV).

Prashant Das said, "Indian real estate has claimed disproportionately scant attention from academics despite offering great industry opportunities. At IIMA, we are working to fill this gap." REITs were initially launched in the United States in 1960 to give all investors, particularly small investors, access to income-producing real estate. Since then, REITs have developed fast over the world, notably from the 1990s to the present (Today, nations that host REITs represent nearly 85 per cent of the world GDP).

The share of REITs in the commercial real estate market in the United States was once around 2 per cent, but it is now somewhere between 10 per cent and 20 per cent. John Worth, Executive Vice President, NAREIT (Washington DC), presented on the US REIT market, stating that around 44 per cent of US households own REITs. According to a Morningstar assessment, REIT portfolio allocation ranged from 5 per cent to 15 per cent, with the highest risk portfolio accounting for 13per cent. "…and so, by being able to go out, collect data, bring that data to the market, you can bring the level of fear down." John discussed the significance of institutions such as NAREIT during times of crisis, such as Covid-19. Communication and coordination with the concerned government ministries are essential during times of crisis.

As per Alok Aggarwal, MD & CEO of Brookfield Properties (India)," despite the epidemic, most of the leading commercial real estate developers have collected 99 per cent of their rentals in the last two years."

Quoting to a recent Nasscom study, where 73 per cent enjoy the flexibility offered by technology and work from home, and 75 per cent yearn to return to the offices, the experts believe that the offices are here to stay and that there will be a systematic shift with a greater emphasis on environmental, social, and governance (ESG) norms, technology, and innovation. With the recent advent of WELL certification, the emphasis will be not only on the sustainability of the building but also on the health of the individuals who work in the office environment. Aggarwal also feels that if the REITs sector matures, we might expect an entity similar to NAREIT in India.

With the changes in the social dimension, the relevance of ESG has also grown recently. Aggarwal distinguishes between REITs and Private Equity Real Estate (PERE) by stating that they are fundamentally different in terms of risk and return. Given the vast diversity that REITs provide, they can protect investors to some extent over time. "We need the next generation of industry leaders to be sensitised about this investment vehicle that brings Indian real estate to the global stage. REITs are already included in our curriculum at IIM," said Abhiman Das, Chair, Misra Centre for Financial Markets and Economy.