Indian
Retail Investors Keen to Cash In on REITs..!
by
Mr. Anuj Puri, Chairman & Country Head, JLL India
The
formation of Real Estate Investment Trusts (REITs) will help in
expansion of the quality real estate universe in India, besides
giving developers another instrument to exit their projects. REITs
would own real estate, and most of them are expected to have their
shares listed on the stock market.
These
listings will provide retail investors a good and an entirely new
opportunity to participate in real estate’s growth story in India.
However,
would an industry that has not been able to exploit its full
investment potential so far be able to attract droves of retail
investors?
With
REITs, the answer is yes. This instrument has the potential to
attract institutional and retail investors alike because of its
inherent nature to provide regular dividends at relatively low-risk
levels.
And
why is that?
One,
because REITs in India will prefer to invest in commercial
developments specifically in the highest quality or Grade A
properties due to the higher rental yields in this asset class.
Two,
because only 20% of an Indian REIT’s monies can be invested in
development, which is the riskiest end of the real estate industry.
The remaining 80% of the fund’s assets must be invested in
income-producing property.
Since
such projects are often office buildings or shopping malls, they have
already been 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 a 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%.
Anuj Puri, Chairman & Country Head, JLL India |
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%. In commercial developments, yields combined with
capital value appreciation over the recent years have been better off
than residential properties.
REITs
in India, like many others around the world, will be required to pay
out 90% of their income from stable assets to investors. That will
result in a twice-yearly dividend.
In
a scenario where the yield is barely 2-3% annually, the dividends
that they pay out to their investors would remain negligible. That is
why it hardly makes any sense for REITs to invest in the residential
asset class in India.
In
Budget 2016, the Modi government removed a major hiccup in the path
of a successful listing of REITs: the Dividend Distribution Tax
(DDT).
DDT
was exempted on special purpose vehicles (SPVs). Rules for REITs were
relaxed and the investment cap in under-construction projects was
raised from 10% to 20%. SPVs are now allowed to have holdings in
other SPV structures and the limit on number of sponsors has also
been removed.
The
first REIT listing is expected by June 2017. Well-known private
equity funds such as Blackstone, Brookfield, Singapore’s GIC and
the Canada Pension Plan Investment Board (CPPIB) are expected to be
the first movers in this space.
They
are also 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-I cities.
A
smooth ride after the first REIT listing will help retail investors
become comfortable with this new investment avenue.
However,
it would be necessary to educate first-time investors about this
platform, and sustained efforts to create awareness around REITs
would be required.
As
REITs will be financial assets dealing in physical assets, challenges
similar to the mutual fund industry can be expected – at least in
the initial few years.
The
journey of mutual funds in India saw its own share of challenges,
which come bundled with any new investment opportunity.
Today,
buying or selling of shares and units of mutual funds is just a few
clicks away, but it took various investor awareness initiatives and
sustained efforts before dealing with these financial assets online
became a success story.
Retail
investors are nonetheless excited at the new and easier real estate
investment opportunity that REITs would open up for them. Clarity on
how big or small the ticket sizes turn out to be for them would
emerge only after the first two or three REITs have been listed.
The
REIT potential in India is huge. Currently, around 229 million sq. ft
of office space is REIT-compliant.
Even
if 50% of this space were to get listed in the next few years, we are
looking at a total REIT listing worth $18.5 billion. Moreover, as
India’s stock of Grade A commercial assets grows, it presents great
opportunities for REITs - and for their potential retail investors.
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