In February this year, Brookfield India Real Estate Trust’s real estate investment trust (REIT) listed on the Bombay Stock Exchange (BSE) at Rs 281.70 per unit. The Toronto, Canada-headquartered alternative investment fund’s REIT listed at a 2.4 per cent premium against its issue price of Rs 275.

The Rs 3,800-crore public issue of Brookfield Asset Management-backed Brookfield India Real Estate Trust’s REIT had closed with an overall subscription of eight times in early February. The issue was subscribed by nearly 12 times in the retail investors’ category, while the institutional investors’ segment had bought it by over five times.

Brookfield’s REIT comprised about 140 lakh sq ft of its total office property portfolio of 420 lakh sq ft. Besides, around 93 per cent of the portfolio value is made up of completed assets. No wonder then that investors lapped up Brookfield’s REIT – India’s third REIT and the first one to be entirely sponsored and managed by an institutional investor – quite enthusiastically.

The Canadian asset management company’s successful public issue announces the arrival of REIT as yet another popular investment tool in the country. It follows the earlier successes of Embassy Office Parks’ REIT in April 2019 – the country’s first REIT public offer – and the public issue of Mindspace Business Parks in August 2020.

The Rs 4,750-crore REIT of Embassy Office Parks had garnered good response with the issue getting subscribed by about 2.6 times on the BSE. The public offer of Embassy’s REIT – a joint venture between US private equity (PE) firm Blackstone and Bengaluru-based realtor Embassy Group – has underlying assets of about 333 lakh sq ft of Grade-A commercial property – consisting of 262 lakh sq ft of completed and operational properties and another 71 lakh sq ft of projects under development.

Similarly, Mindspace Business Parks REIT, the country’s second REIT issue, had defied the despair surrounding COVID-19 when it hit the market with its Rs 4,500-crore public offer in August 2020. The public offer was sold by around 10.61 times in the institutional investors segment, while retail investors participated rather vigorously by subscribing to the issue by more than 15.77 times. The public offer of Mindspace Business Parks REIT, jointly owned by Mumbai-headquartered K Raheja Group and Blackstone, comprises 295 lakh sq ft of commercial properties.

A promising start to the REIT market seems to have re-energised the country’s cash-strapped real estate sector, especially the commercial real estate (CRE) segment. The REITs are particularly a lifesaver for the realty sector that has seen funding from banking and private equity drying up in recent years. Industry experts note that the buoyant public issues of the three REITs will encourage more builders to monetise their rent-yielding commercial assets through this route. “REITs will help raise capital and improve the fund flows into the sector. REITs are a great indicator of the strong future that commercial real estate has in India,” opines Knight Frank India Chairman and Managing Director Shishir Baijal.

Moreover, the REITs act as a major investment tool for investors. Analysts note that participation of retail investors will further increase in future REITs, enabling them to earn dividend income from fully-leased and listed commercial real estate. “REITs are good news for investors who have a small appetite and yet want to invest in the otherwise highly-cost-intensive commercial real estate (CRE) market. With REITs, they can literally take a small bite of the large Indian CRE pie,” points out Anuj Puri, the chairman of Anarock, the country’s leading, specialised, real estate services company.

Favourable norms

REITs are slowly but surely becoming an important investment tool in India. But these investment trusts have been around for more than six decades in the US. It was way back in 1960, that the US legislature signed a law and introduced REITs to bring the benefits of CRE to common Americans.

REITs are securities linked to real estate that can be traded on stock exchanges once they get listed. They function like mutual funds with the units of REITs having CRE – such as rent-yielding commercial properties – as their underlying assets. The value of these rent-yielding assets is divided into units by an REIT entity – which is often a real estate company or an investment company – and sold to investors. The money collected by an REIT is employed in the business of building and developing real estate. Besides, the income generated by an REIT from rent-yielding commercial complexes is distributed among unit holders, and the money that remains after it is distributed to all unit holders is profit for the REIT.

In the past decade, the Indian real estate industry has witnessed a massive shift from traditional finance to an era of structured finance, including PE and initial public offers (IPOs). Foreign investors, including global PE firms, have shown keen interest in India’s real estate market, owing to its strong economic fundamentals, high potential for prolonged growth and favourable demographics. As share of structured finance in real estate investments grew, introduction of alternative investment vehicles in the sector became the next logical step, finally leading to REITs.

Incidentally, the Securities and Exchange Board of India (SEBI) introduced the draft REIT regulations as early as 2007. However, it was only seven years later, in 2014, that the SEBI (Real Estate Investment Trusts) Regulations, 2014 were enacted. The regulations provided a sound legal foundation and a definite direction for REITs to grow. Besides, other reforms, such as liberalisation of foreign direct investment (FDI) norms in real estate and opening up of the domestic mutual fund industry to foreign investments helped the market become receptive to REITs.

Meanwhile, the biggest push to REITs came from many market-friendly norms. In fact, proactive measures from the government and the SEBI and subsequent amendments to the norms and regulations paved the way for REITs to hit the market for the first time in the country in April 2019.

Many disclosure and listing norms in recent years have brought transparency to REITs and enhanced investors’ confidence in them. A rule regarding the mix of underlying assets in an REIT offer has made the instrument quite lucrative for investors. Accordingly, an REIT public offer must comprise 80 per cent of rent-yielding assets, while the remaining 20 per cent can be a property or properties under construction. Another norm mandates that an REIT must distribute at least 90 per cent of its taxable income to its shareholders.

Minimum application size for an REIT issue has been reduced from Rs 1,00,000 to Rs 50,000, making the REIT more attractive and viable to retail investors. Market experts reveal that the SEBI is considering further opening up REITs to retail investors by relaxing the current minimum application size of Rs 50,000. Besides, widening the definition of strategic investors to include mutual funds and insurance companies has turned the REIT market robust. And to top it all, the Income Tax exemption on dividends distributed by REITs to their investors has made REITs a rage in the market.

“A large part of Indian investors put money in government bonds and fixed deposits. Interest rates have dropped significantly, and that makes REITs very attractive since there are chances of higher return,” notes Anshuman Magazine, the Chairman and CEO (India, South-East Asia, Middle East & Africa), CBRE. Besides, investors can exit REITs any time by selling the shares in the stock market, adds Mr Magazine.

A major shift in the Indian office real estate landscape is playing a vital role in turning REITs into a hot investment tool. From a majority of office stock being largely unorganised in small-format, non-institutionally-owned buildings with few amenities, the landscape has now consolidated with Grade-A developers owning large, modern, corporate IT parks with a rich mix of amenities. This change in office realty is set to fuel the growth of REITs further.

“The focus of developers on Grade-A commercial developments, backed by increasing demand from multinational tenants, has led to the onset of large-format campus developments with increased investments by highly-reputed institutional investors. This has resulted in REITs becoming a well-recognised concept and investment product,” stresses Ankur Gupta, the managing partner and head of India-real estate, Brookfield Asset Management.

Bright future

The Indian REIT market has just had a robust start. It has, however, a long way to go to match the growth of the global REIT market. According to estimates of the European Public Estate Association, total global value of listed real estate companies is around $3.864 trillion. Property under REITs is worth $2.042 trillion, accounting for nearly 53 per cent of the total value of listed real estate companies.

According to industry estimates, the three listed REITs in India hold 768 lakh sq ft of the total of 5,000 lakh sq ft of Grade-A office space in the country. A healthy demand and supply dynamics for office space, high potential of the CRE market and rising interest in the Indian CRE market among global PE funds and other investment companies are likely to witness healthy growth of Indian REITs. Realty market experts foresee another five REIT listings to take place in the next two years.

“While work from home (WFH) could look like an inflection point in the office space segment, the demand for office space is not going anywhere. There is a steady increase in footfalls across tech parks, and with vaccine rollout, employees will be back in office,” points out Vikaash Khdloya, the Deputy CEO and COO of Embassy Office Parks REIT.

According to rating agency CRISIL, the country’s top-10 commercial real estate owners, including developers and funds, own around 1,840 lakh sq ft of commercial properties, which could fetch annual lease rental income of Rs 17,000 crore. CRISIL further adds that these companies have the potential to raise Rs 1,50,000 crore in REITs. Besides, the Indian REIT listing could expand beyond office space to include other segments of the CRE market, foresees the rating agency.

Analysts note that the REIT landscape in India is likely to evolve further to include varied asset classes in the medium to long term. The outbreak of COVID-19 has accelerated adoption of cloud-based and information technology (IT) services. This would amplify the demand for data centres, and they would soon be an essential part of any REIT portfolio in the near future. Besides, growing thrust on manufacturing and Goods and Services Tax (GST)-induced growth of logistics would lead to industrial parks and warehouses becoming an integral part of any future REIT offers. In short, REITs have come as a much-needed breather and a driving force for the battered Indian CRE market.