Can Indian Retail Investors Cash-in on REIT Opportunities from 2017?

Anuj Puri, Chairman & Country Head, JLL India
Thursday, January 19, 2017
Anuj Puri, Chairman & Country Head, JLL India
Headquartered in Gurgaon, JLL is India's premier professional service firm specializing in real estate. The entity provides investors, developers, local corporates & multinational companies with a comprehensive range of services including research, analytics, consultancy, transactions, project & development services.

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 superb and 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? The answer, thanks to REITs, is a resounding yes. REITs have the potential to attract institutional & retail investors alike because of their inherent nature to provide regular dividends at relatively low-risk levels.

And why is that so? One, because REITs in India will prefer to invest in the commercial developments, specifically the highest quality, or Grade-A, properties due to the higher rental yields in this asset class, and two, because only 20 percent of an Indian REIT's monies can be invested in development, the riskiest end of the real-estate industry. The remaining 80 percent of the fund's assets must be invested in income-producing property. Since, such projects often office buildings or shopping malls, have already been developed and have tenants, their income stream is relatively easy to predict. As they increase in value, the 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 percent. 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 is compared, yields in the former stand much lower at 2-4 percent.

In commercial developments, yields combined with capital value appreciation over the recent years have been better off than residential properties. Indian REITs, like many others around the world, will be required to pay out 90 percent 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 percent annually, the dividends that they pay out to their investors would remain negligible. That is why it doesn't make sense for REITs to invest in the residential asset class in India.

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