Can Indian Retail Investors Cash-in on REIT Opportunities from 2017?
Date: Thursday , January 19, 2017
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.
What has Happened So Far
In Budget 2016-17, the Modi government removed a major hiccup to the 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- 20 percent. 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, GIC and CPPIB are expected to be the first movers in this space. They are also the most likely to be successful in this endeavor. A smooth ride after the first REIT listing will help retail investors become comfortable with this new investment avenue. Educating first-time investors 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 mutual funds is 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, nonetheless, are excited at this new and easier investment opportunity that REITs would open up for them. An idea of how big or small the ticket sizes turn out to be for them would be known only after the first two or three REITs have been listed. The REIT potential in India is huge. Currently, around 229 million sqare ft. of office space is REIT-compliant. Even if 50 percent 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, India\'s growing stock of Grade-A commercial assets presents great opportunities for REITs and their potential retail investors.