Huge Upside Potential for REITs in India, INR 4.5 Lakh Cr Worth of Prime Office Stock is REIT-worthy - Vestian
New Delhi, 3rd December 2024: Vestian's latest report on 'REITs: Reshaping India's Commercial Space' states that 60% of India's total Grade-A office space qualifies as REIT-worthy, highlighting the upside potential of REITs to transform the commercial real estate investment landscape. However, India's REIT market is currently at a nascent stage compared to major global economies with only four listed REITs, covering an area of 125 Mn sq ft across the retail and office markets.
Gradually, REITs are becoming popular among foreign and domestic investors owing to attractive returns in the form of dividends. Since their inception, REITs have distributed INR 16,800 crore, more in dividends compared to the entire NIFTY Realty Index. Despite producing better returns compared to the NIFTY Realty Index, the market capitalization of REITs remains relatively low. India has a market capitalization of 13.7% of the total listed real estate sector which is low compared to mature markets such as the USA (98.9%), Australia (94.8%), and UK (92.5%).
Moreover, Embassy REIT, Mindspace REIT, Brookfield India REIT, and Nexus Select Trust REIT generated returns of 24%, 18%, 6%, and 39% respectively since their inception. On the other hand, BSE Realty Index has provided higher returns (317% in the past 66 months) compared to REITs. However, favourable regulatory environment, better returns on investment, and a rapidly expanding office market are likely to provide impetus to the REITs market in India.
City-wise Analysis
Among India's top seven cities, Bengaluru leads the pack with 33% share of the total REIT-worthy stock. It is followed by Hyderabad and NCR with 21% and 15% shares respectively. While Mumbai and Pune together account for 21% of India's REIT-worthy stock, Chennai holds 10% and Kolkata contributes a mere 1%.
| City | Grade A Stock (Mn sq ft) | REIT–worthy Stock (Mn sq ft) | Building Value (INR Lakh Cr) |
| Bengaluru | 267.4 | 171.2 | 1.35 |
| Chennai | 82.6 | 50.9 | 0.35 |
| Hyderabad | 150.0 | 110.9 | 0.71 |
| Kolkata | 27.4 | 6.7 | 0.02 |
| Mumbai | 147.5 | 70.3 | 1.14 |
| NCR | 131.3 | 78.3 | 0.63 |
| Pune | 77.8 | 37.9 | 0.30 |
| Total | 884.1 | 526.3 | 4.50 |
Source: Vestian Research
Hyderabad boasts the highest proportion of REIT-worthy stock, accounting for approximately 74% of the city's total office inventory, while Kolkata holds the lowest share at around 24%. Notably, the majority of REIT-worthy assets are concentrated within the commercial hubs of these cities, driven by the presence of branded Grade-A office buildings in these prime locations.
Sustainable REIT-worthy Stock
Nearly 67% of the total REIT-worthy stock in India is green-certified, highlighting the increasing focus on sustainability among Grade-A developers. According to our report on sustainability, green-certified buildings command a rental premium of 12-14% over non-green buildings. This makes them an attractive investment option, as higher rental yields can lead to greater dividend distributions for investors.
Future of REITs
The future of REITs in India looks promising with mutual funds and corporations gradually increasing their stakes in REITs. Many are also planning to launch dedicated schemes based on REITs' performance in the stock market. These developments could enhance liquidity for REITs, enabling them to secure funding more efficiently and at competitive rates. Furthermore, REITs are expected to be an indispensable investment tool to diversify investor portfolios and provide consistent income.
In a nutshell, currently REITs are at an early stage of growth in India but are gradually expanding, driven by favourable regulatory environment and proactive government policies from the SEBI. As the regulatory environment matures, India is likely to witness more and more REIT listings with expansion into new real estate segments. Additionally, the launch of SM REIT is a step in the right direction, tapping into smaller value assets and improving liquidity in the real estate sector.
About Vestian:
Vestian is an occupier-focused workplace solutions firm specializing in commercial, residential, industrial, retail and hospitality sectors. Headquartered at Chicago, Vestian has offices across US, India, China, UK, Sri Lanka and the Middle East. Our core strength lies in providing customized innovative solutions that are aligned to the client's business objectives. Our extensive service portfolio includes Investment & Consultancy Services, Transaction Advisory Services, Project Services, Retail Business Solutions and Integrated Facilities Management Services. Vestian is the only global workplace solutions organization to be certified in both quality management systems and environmental health & safety standards such as ISO 9001, ISO 14001, ISO 45001 and ISO 37001. For further information on the company, you can visit us at www.vestian.com
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