Buildings stand illuminated at night as seen from a Aer rooftop bar in the Worli area of Mumbai, India. (Photographer: Kuni Takahashi/Bloomberg)

This Is How Big The REIT Opportunity In India Is

India has $35 billion worth of commercial real estate that can help investors take an exposure to such income-generating assets through real estate investment trusts, according to property consultant JLL India.

The commercial property market is estimated to provide 294 million square feet of space for REITs from the existing office area, according to a report by JLL India. It expects investments in office space to drive REIT valuations, leading to higher returns.

JLL said rising transparency levels, progressive regulations and a robust commercial real estate market in the country have attracted institutional investors to the segment. Investors have allocated nearly $17 billion through direct and entity-level investments from 2006 to 2019 in office space, it said.

India’s first such trust, Embassy Office Parks REIT, raised Rs 4,750 crore in its initial public offering, and was subscribed more than two-and-a-half times. And the market regulator has also lowered the subscription requirements and lot sizes to draw retail investors.

Higher repo rates in India, according to JLL, have led to higher yields from risk-free instruments compared other developed markets in the world. This translates to higher return expectations from REITs in India compared to other developed markets where the risk-free rate is much lower, it said.

“Indian office space holds the potential to offer additional 101 million square feet of office space for REIT from the new office completion expected during 2019-21. This could help upcoming REITs to gain from upside in rentals as well as capital appreciation,” Samantak Das, chief economist and head of research at JLL India, said. “While the strong institutional flow of funds into real estate will continue to provide initial momentum towards REITs’ growth in the country, active participation of insurance and pension funds in future will help in long term growth of the market.”

The need for office space will be robust over the next three years due to emergence of new occupiers and demand from information technology and banking and financial services sectors, the report said.

India’s office market with 541 million square feet grade-A stock has seen average annual demand of 30 million square feet over last four years, according to JLL. In 2018, the absorption exceeded 33 million square feet and it’s expected to hit 38 million square feet this year, the report said

Bengaluru, with 33 percent share of space available for REITs, will provide the highest assets totalling 97.8 million square feet worth $10.7 billion, JLL India said, adding that most of these assets are singly owned by developers or large funds, thereby making it easier to aggregate the assets and manage them for REITs.

Mumbai follows with 17 percent share of space for REITs at 49.7 million square feet worth $8.6 billion. This, according to JLL, is attributed to the high per square foot office capital values in Mumbai. Delhi-National Capital Region and Chennai follow Mumbai both in space and value terms.

“We expect to see other asset classes like retail, warehousing and hospitality also offering REITable assets in the times to come,” said Ramesh Nair, chief executive officer and country head at JLL India.

Also read: New InvIT, REIT Norms Will Help Widen Investor Base, Says ICRA