REITs may help generate 14 percent return annually to investors

New Delhi: Real Estate Investment Trusts (REITs) could offer a return of 14 per cent per annum to domestic and global investors on healthy demand for good quality commercial properties especially office space despite overall slowdown in the real estate market, according to ANAROCK.

In 2014, market regulator Sebi had notified the REIT regulations but the country is yet to see the first launch of such a trust. REITs are listed entities that invest in income-generating properties and distribute most of the income through dividends to unit holders. "The listing of India's first REIT by Blackstone-backed Embassy Group has been in the offing for quite some time, but it now finally appears that it will be listed within the first half of 2019," said Shobhit Agarwal, MD & CEO, ANAROCK Capital, which is part of property brokerage firm ANAROCK founded by Anuj Puri in 2017.

Last year, Embassy Office Parks -- a joint venture firm of Blackstone and Embassy -- filed the draft red herring prospectus (DRHP) with Sebi to launch REIT for raising over Rs 5,000 crore. This would be Asia's largest in terms of portfolio size of 33 million sq. ft.

Agarwal said large foreign institutional investors like Japan's NikkoAm-Straits Trading Asia and US' North Carolina Fund, among others, got SEBI approval to invest in India under REITs. "Several FIIs had already conquered India's equity markets in the past, and now it is the turn of the real estate market via REITs," Agarwal said, adding that most of the FIIs are patient investors focused on stable long-term returns.

He noted that India's REIT environment is not really a faithful emulation of that of developed international markets like Singapore, the UK, Canada and Australia. "In Canada, the average return for REIT investors was around 10 per cent in 2017, while in the UK, it hovered between 8-10 per cent. This average return is on all REITable assets including commercial and residential projects together. In India, the projected five-year returns on commercial assets is an optimistic 14 per cent, largely because Grade A commercial real estate has been on a protracted winning streak since 2017. Commercial real estate withstood the vagaries of the various reforms much better than the residential asset class," Agarwal said.

The consultant said that the data currently suggests that about 50 per cent of the total office stock in India at over 800 million sq.ft could qualify for REITs - a definite improvement over the 30 per cent two years ago. "Once REITs become an on-ground reality, the market must remain vigilant. There could be a major issue for Indian REITs if the supply of investment-grade office spaces does not keep pace with demand. If it doesn't, we will see an asset bubble form in the short-to-mid-term," he cautioned.