Big PE players queue up to list REIT portfolios

Private equity firms such as Blackstone, Brookfield, Singapore’s GIC and Canada Pension Plan Investment Board (CPPIB) are expected to be the first movers in listing of Real Estate Investment Trusts (REITs) in India.

“They are the most likely to be successful in this endeavour, given the fact that they have a good portfolio of superior Grade A office spaces in Tier 1 cities,” said Anuj Puri, Chairman and Country Head, JLL India.

“After the first REIT listing, it is expected to be a smooth ride and help other retail investors to become more comfortable with this investment avenue,” he added.

The country’s REIT potential is huge. Currently, around 229 million square feet of office space is REIT-compliant. “Even if 50 per cent of this space were to get listed in the next few years, we are looking at a total REIT listing worth $18.5 billion,” Puri said.

The formation of REITs is expected to expand quality real estate in the country, giving its developers another route to exit their projects.

“As India’s stock of Grade A commercial assets grows, it presents great opportunities for REITs — and for their potential retail investors,” Puri explained.

In Budget 2016, the government had removed a major bump in the path of successful listing of REITs: Dividend Distribution Tax (DDT).

DDT was dropped in the case of special purpose vehicles (SPVs). Rules for REITs were relaxed and the investment cap in under-construction projects raised to 20 per cent from 10 per cent. SPVs are now allowed to have holdings in other SPV structures and the limit on the number of sponsors has also been removed.

Now, REITs would own real estate, and most of them are expected to have their shares listed on the stock market. According to Puri, “These listings will provide retail investors with a good and an entirely new opportunity to participate in real estate’s growth story in India.”

Puri said projects are often office buildings or shopping malls that are already developed and have tenants; so their income stream is relatively easy to predict.

“As the value of these projects increases, REITs will hold them for the long term and not trade in and out of real estate. As for the yields, the rental yield in commercial asset class across the country is usually in the range of 8-11 per cent.”

“If the capital value appreciation for residential property is not taken into account and only the rental yields of both residential and commercial asset classes are compared, yields in the former stand much lower at 2-4 per cent. In commercial developments, yields combined with capital value appreciation over the recent years have been better off than in residential properties.”

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