February 25, 2024

REITs – THE RIGHT WAY TO INVEST IN INDIAN COMMERCIAL REAL ESTATE

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₹12,000 crores distributed by Indian REITs in the past four years, more than the entire Nifty Realty Index combined

Regulated, transparent and liquid way to invest in commercial real estate that is managed by professional teams.

In just four years, through a pandemic and with significant market volatility, Real Estate Investment Trusts (REITs) have come a long way.

Today, there are 4 REITs that comprise ₹73,000 crores of equity market capitalization, encompass 105 million square feet of commercial space, and span the Indian office and retail sectors.

Recently, the asset class achieved a significant milestone, with distributions by Indian REITs crossing ₹12,000 crores since 2019. This surpasses the combined dividends distributed by real estate companies that form the entire Nifty Realty Index.

Embassy REIT, the first listed REIT in the Indian market, alone has distributed over ₹7800 crores since its listing in April 2019 and has seen its retail unitholder base grow to over 75,000 investors.

Over the last 4 years Embassy REIT has leased over 10 million square feet and collected 100% of rents despite facing the challenges of the pandemic.

With its vast market size, favourable demographics, and rapid urbanization, India offers immense opportunities for real estate investment and for REITs in particular. With India continuing to be a hiring destination for global multinationals, and the purchasing power of Indian consumer continuing to rise, the resilience and potential of India’s commercial real estate sector and the growing popularity of the REIT asset class has never been more apparent.

Historically, Indian real estate has been illiquid and primarily residential-focused, and fared poorly on corporate governance.

REITs have completely changed those perceptions.  REITs provide retail investors an ideal investment vehicle to invest in commercial real estate, through a publicly traded unit, without actually having to buy, own and manage a physical real estate asset. They are also required to own at least 80% of assets in income producing properties and mandated to pay out at least 90% of cash flows semi-annually.

Ritwik Bhattacharjee, Chief Investment Officer, Embassy REIT said,

“REITs provide retail investors exposure to Grade A commercial real estate in a liquid, transparent and highly regulated form in two powerful ways.  First, REITs are mandated to pay out at least 90% of net distributable cash flows to their unitholders. So, investors get regular income through distributions. Second, investors get the capital appreciation as well, as REITs are effectively high dividend stocks with strong embedded growth potential through vacant space lease up, rental escalations and significant rental reversions at or above market rents.”

The future of the REIT market looks extremely promising. The tax efficiency of the REIT distributions and their affordability, with an individual able to buy just one share of a REIT for as low as ₹100 – ₹400 per unit. That’s as good as buying real estate with just a few hundreds of rupees as opposed to a few lakhs to a few crores, which is the minimum investment one would need to make, if they were to buy such high-quality commercial real estate directly or through a fractional ownership/ strata structure. That’s why REITs offer this excellent opportunity for retail investors to participate in India’s commercial real estate growth story.