India emerges as global hotspot for commercial real estate investment

REIT (Real Estate Investment Trust) investors in the country can look forward to higher yields as foreign investors will now be able to put in their money more easily and also pitch-in with their international expertise in management of such trusts. The government, in the Budget announcements recently, has allowed easier participation by foreign portfolio and institutional investors in the Indian REITs by easing the statutory debt funding requirements.

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REIT, which allows small investors to invest in commercial real estate, is rather a new financial trust set up in the Indian context but many fund managers and even foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) have gained immense experience and expertise in overseeing the operations of such trusts over the last 3-4 decades for which these set-ups have been around in developed countries.

International experience in running REITs

Now these FPIs and FIIs will be able to enter the REITs market in India and lend their expertise in managing the affairs of REITs, taking the graph of yields from such trusts to the next level. This will not only enhance the share holders or the unit holders’ returns from investment but also give an opportunity to the Indian fund managers to get a better grip on the complexities and nuances involved in the running of such trusts.

There are many pension funds in the western world which have committed to provide certain minimum returns to the contributing pensioners or members but are not able to generate that kind of yields in their own countries. They have been looking at opportunities to maximize their returns to a level where they can sustain the minimum payout in terms of percentage they have promised to the members. These include certain sovereign funds also. Such a situation has arisen in some Asian countries also like Japan where the return from pension funds or sovereign funds is lower through investment in their own countries. These funds will be able to invest in India and get significantly higher returns to be able to meet their commitments.

Win-Win for all

Such funds have already been investing in REITs in their own countries over the last few decades and have gained the critical experience in running the show by way of board positions and other key appointments in REITs. However, in the last few years, the returns from commercial properties in their own countries have been eclipsed by yields from commercial assets in some of the fast developing countries like India. Hence it is a win-win for them as well as the Indian investors who will gain by way of better and more professional management of the affairs of REITs.

“Global investors are looking at India today for better yields and many international funds are venturing into the commercial real estate investment for that purpose. They bring with them quality experience in running malls, office spaces and other commercial properties more efficiency with the global best practices,” said Achal Raina, COO, Raheja Developers.

The return on investment (ROI) from commercial properties can be 4-5% in the best of markets in the USA. On the other hand, the same will be 7-9% in India. In some exceptional locations and assets, the ROI can be as high as 13% in India. India now has considerable stock of Grade A office spaces and the vacancy levels have consistently been less than 15%, hallmark of a thriving and high-potential office-space market.

“The mosaic of the commercial properties in India has changed completely in the last few years with better architecture and proper transparency in deals. This is drawing many international investors to India. These investors are contributing greatly in professional running of a commercial real estate asset, given their global exposure and rich experience,” said Uddhav Poddar, MD, Bhumika Group.

Three REITs became reality in India

The REITs scenario is heating up in India. The first one was the Embassy Office Parks REIT, which listed in 2018. Mindspace Business Parks REIT and Brookfield Real Estate Investment Trust have also made their debut now. These REITs are performing very well. In fact, Embassy REIT has already become the largest REIT in Asia.

“The recent REITs in India have already seen some foreign collaboration. Now with the governments allowing FPIs and FIIs to invest in debt securities of REITs, there will be more such investment which will only make the REIT management scenario more professional and help the operations of such trusts meet global standards,” said Ashish Bhutani, MD, Bhutani Infra.

The net absorption of Grade A office space in India has been astounding, to say the least. The net absorption touched 46 million square feet mark in 2019, one of the highest in the world. Even during the pandemic stricken year in 2020, the net absorption was as high was 25 million square feet. There is every possibility that the net absorption in 2021 will be over 30 million square feet.

“With a strong economy and a thriving corporate sector, India will add more of Grade A office space than probably any other developing country in the coming years. The previous years are a testimony to that. The global investor community is left with no choice but to include India in its investment portfolio as the returns are great here,” said Manoj Gaur, CMD, Gaurs Group.

“India has out-performed some of the best markets when it comes to ROI in commercial real estate. These global investors are also comforted by the fact that the REITs’ listing norms are the strictest in India as compared to the global scenario with enough checks and balances put in place by SEBI,” said Kapil Kapur, Director Sales, Strategy and Business Development, Bullmen Realty.