REITs in India: 24% returns and 60% of office space ready for investment

Embassy REIT, Mindspace REIT, Brookfield India REIT, and Nexus Select Trust REIT generated returns of 24%, 18%, 6%, and 39% respectively since their inception

About 60% of India's Grade-A office space qualifies as REIT-worthy, meaning it could be part of a Real Estate Investment Trust (REIT), according to a recent report by Vestian, an occupier-focused workplace solutions firm. This indicates a huge opportunity for REITs to reshape the commercial real estate landscape in India.

 

Real Estate Investment Trusts (REITs) are a type of investment that allows individuals to invest in large-scale commercial real estate properties, such as office buildings, shopping malls, and hotels, without owning the physical properties themselves. They operate by pooling funds from multiple investors to purchase and manage real estate, generating income primarily through rent, which is then distributed to investors in the form of dividends.

 

 

However, the market is still in the early stages. Currently, there are only four listed REITs in India, which together cover 125 million square feet of office and retail space. Compared to global markets, India’s REIT market is small, as countries like the USA, Australia, and the UK have much larger REIT markets, with the USA, for instance, having 98.9% of its real estate sector in REITs.

 

"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 Rs 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%)," noted Vestian. 

 

Why Are REITs becoming popular?

REITs are becoming increasingly popular due to their ability to generate attractive returns, especially in the form of dividends. Since their inception, India’s REITs have distributed over Rs 16,800 crore in dividends, outperforming the returns of the NIFTY Realty Index. However, despite these strong returns, the the total value of all listed REITs is still low, accounting for only 13.7% of the total listed real estate sector in India.

 

REIT Performance vs. Other Real Estate Investments

In terms of returns, the major REITs in India, such as Embassy REIT, Mindspace REIT, Brookfield India REIT, and Nexus Select Trust REIT, have provided varying returns ranging from 6% to 39% since their inception. On the other hand, the BSE Realty Index has given 317% returns in the last 66 months. This shows that while REITs are generating decent returns, other real estate investments have offered significantly higher returns over the same period.

 

City-wise Analysis of REITs in India

In India, the distribution of REIT-worthy properties is concentrated in major cities:

 

• Bengaluru leads with 33% of the REIT-worthy stock.
• Hyderabad follows with 21%
• NCR (National Capital Region) has 15%
• Mumbai and Pune account for 21%
• Chennai holds 10% 
• Kolkata contributes a small 1%.

 

The largest portion of REIT-worthy stock is found in cities like Hyderabad, where 74% of the office inventory is eligible for REITs. 

 

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 the Vestian report on sustainability, green-certified buildings command a rental premium of 12-14% over non-green buildings, which makes them an attractive investment option, as higher rental yields can lead to greater dividend distributions for investors. 

 

"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," noted the report. 

"The demand and absorption for Grade A offices are projected to grow steadily. Recognizing this trend, many developers are actively focusing on this segment, with new projects in the pipeline to address the increasing need for premium commercial spaces.

 

REITs (Real Estate Investment Trusts) in India currently hold a relatively small percentage of total Grade A office space. Given that REITs primarily invest in rent-yielding commercial assets, the dynamics of Grade A office supply and demand play a pivotal role in their growth. This presents a significant opportunity for REITs to expand their footprint in India, leveraging the rising demand for high-quality office spaces to enhance their portfolios and deliver value to investors," said  Amal Mishra, Founder and CEO, UrbanVault, a managed office space provider in Bengaluru and Gurgaon.