India waits for the REIT moment

The country has yet to see a single real estate investment trust be listed as the industry awaits a final code from regulators.

It has been more than three years since India’s capital markets regulator approved the establishment of real estate investment trusts in the country, a long-anticipated reform expected to create an alternative capital raising model, as well as exit route, for private real estate investment managers. 

To date, however, not a single REIT has launched. Embassy Office Parks, a joint venture between US asset management giant Blackstone and Bangalore-based developer Embassy Group, filed a REIT application with the Securities and Exchange Board of India in October 2016, and was officially registered in mid-2017, reportedly becoming the first reality trust to be registered in India. However, the REIT is yet to be formally issued. 

And yet senior private real estate executives in India have faith 2018 will be the year. Sources told PERE that this year should herald at least one listing by a marquee manager that may want to test the market.

One international manager with significant office holdings in India, speaking with PERE on condition of anonymity, said his firm would like to list a REIT as soon as it makes sense. The only delay, he said, was due to technical issues related to the current proposed structure of the REITs, such as what assets can be listed.

As recently as year-end 2017, amendments to the 2014 REIT regulations were still being made by the Securities and Exchange Board of India. Progress is being made: the revisions included allowing REITs to raise funds by issuing debt securities and relaxing the minimum asset holding criteria.

Hurdles remain 

But while these changes have been initiated in response to feedback from industry bodies, other issues continue to delay a REIT listing in India. The mandatory listing of a REIT, for example, is a cumbersome requirement, according to Taponeel Mukherjee, chief executive at Development Tracks, an Indian real estate and infrastructure advisory firm. 

“Just because a REIT listing is popular in places like the US and Singapore does not mean a listed structure would be popular here, too,” said Mukherjee. “Doing away with the mandatory listing requirement would allow institutional investors to create private investment vehicles that would give the market much-needed liquidity.”

Additionally, as one pan-Asia manager pointed out to PERE, there would be little value for global institutional investors to invest in an India REIT product unless its dividend yield is more than 10 percent. It may even need to be higher, he said, given investors either underwrite a 2.5-3 percent currency loss year-on-year or if they hedge it will cost 400 bps per annum – again, netting a 6-7 percent net yield after currency loss on a 10 percent overall dividend yield. 

The REIT structure should also incentivize developers to pursue an asset light business model by transferring some of their balance sheet assets to a REIT, and reinvesting the capital raised through the sale of assets back into the business. However, in its current form, only large portfolio holders – those with more than 5 billion rupees ($78.2 million; €64.2 million) in assets – have the capacity to list a REIT, whereas Mukherjee is of the view that even the middle market developers – those that have assets in value of around 2 billion to 8 billion rupees – should be permitted to create private REIT structures. 

One of the groups that contemplated a REIT listing was IndoSpace, a joint venture between Everstone Group and Realterm Global, and one of the largest industrial specialists in India with a 20 million-square-foot portfolio across 28 logistics and industrial parks. The firm wound up doing a private capital raise, forming a joint venture partnership with Canada Pension Plan Investment Board last May. 

“It would not be the case in the near future,” said Brian Oravec, partner and chief executive at IndoSpace, when asked if a REIT listing by IndoSpace was still likely. “We are not in the position where we need to access the capital market right now.”

In his view, India is not likely to see an industrial REIT for many years simply because there are not many completed and stabilized assets in the industrial sector currently that could be invested into a REIT. 

“Our general view is that the first REIT should be an office REIT. It is the best understood asset class in India and will have the highest probability of trading and therefore creating a strong REIT market for India,” Oravec added.

Indeed, close to 306 million square feet of office space in the country is compliant with REIT listing rules, according to property consultancy JLL India. 

There is market will power to get REITs up and running, and the relevant stock to do so. Now, as often is the case in India, all eyes are on the government to set a fuse on this much-anticipated segment of the country’s real estate capital market.