The future of commercial real estate investing through REITs


With the pace of improvement driven by the availability and effectiveness of a vaccine, commercial real estate and REITs are expected to begin to recover in 2021.

By Ashok Mohanani

REITs made a big entry into the Indian market at the right time. The Real Estate Investment Trust (REIT), a popular instrument around the world, was introduced in India a few years ago with the aim of attracting investment into the real estate sector by monetizing rental income assets. When Embassy Office Parks, a joint venture between real estate development firm Embassy Group and global private equity leader Blackstone, listed the country’s first REIT, the industry predicted that the investment vehicle would soon become a reality. in India. The impact on real estate due to Covid-19 prevailed for 5 quarters. For seven months between the first and second waves, the demand for repressed and new commercial properties was pronounced.

REITs for the benefit of the commercial sector

With the advent of REITs, the commercial sector may experience greater capital appreciation, compared to the residential sector. REIT training is not only a boon for investors, but also a benefit for developers. For developers, this could unlock the value of their business assets. They may view REITs as an exit vehicle, at an extremely attractive cap rate, thereby reducing their high leverage.

Investors will get capital appreciation and income from the property without having to buy and essentially maintain it. It will open up real estate to a wider range of investors who are particularly looking to invest in the affordable housing sector. Commercial real estate is expected to do well in India in the coming months.

Also Read: Need for Safer, Bigger Homes to Drive Residential Real Estate Demand

REIT Outlook

With the pace of improvement driven by the availability and effectiveness of a vaccine, commercial real estate and IPFs are expected to begin to recover in 2021. IPFs have largely resisted the pandemic due to the measures they have taken. taken to strengthen their financial situation. Gradually, the situation improved with the reopening of stores and businesses. Much of the improvement was in sectors that had been directly impacted by the closures, accommodation / resorts, retail and diversified REITs.

We cannot predict the flow at this time due to the uncertainty of Covid-19, but we can certainly say that there is a demand for commercial offices, despite working from home. It must be admitted that the residential market is flat, which was further impacted by the second wave of Covid-19 in March 2021. It will be important to distinguish between the short-term or transient effects of the pandemic and the changes to long term or permanent trade. real estate markets. However, the future of office spaces remains bright despite the many obstacles caused by the Covid-19 pandemic. The situation would improve as the worst of the second wave of Covid-19 has passed.

Immediate confidence in the success of India’s first REIT led to preparations for the launch of the second in India, Mindspace Business Parks REIT, backed by K Raheja Corp and Blackstone. According to CBRE’s Global Occupier Sentiment Survey 2020, the importance of physical office space is expected to remain strong. 38% of those surveyed said physical office space will remain as important, if not more. In addition, 70% of survey respondents were also confident that long-term real estate strategies are in place amid the pandemic.

Read also: Why REITs are a good investment option when compared to buying direct real estate

Sentiment towards office space will remain positive in India. Therefore, investors are likely to continue to view REITs as a stable income generator, even in the long term, as the office sector in India has historically experienced a high occupancy rate supported by long, pre-existing lease extensions. companies. In the long run, the three REITs should do well in terms of appreciation. In the past, for places like Mumbai, investors received an average return on investment of 6%. The rental yield is subject to approximately 6-7% for commercial premises. Data is expected to remain stagnant even in short-term investments.

In recent times, the Indian market has witnessed two successful REIT listings from Embassy Office Parks and Mindspace REIT totaling Rs 9,250 crore. Amid the pandemic, Blackstone and Brookfield also announced the two biggest deals in the Indian real estate market, amounting to around Rs 25,000 crore. The recent listing of Brookfield REIT was oversubscribed eight times. With this, the industry is witnessing the long term prospects of this sector.

The development has established a forecast of transparency, depth and liquidity for the commercial real estate market in India. The increased competition and transparency that should result from a vibrant REIT market will lead to better maintenance and operation of assets. It is expected that a more developed and professional REIT sector will significantly contribute to broadening the base of real estate investors, in particular by attracting institutional and retail investors.

Over the next few years, appreciation may be reasonably good for investors. Over the past two years, the sector has suffered a lot. However, in the coming years the real estate sector will recover to an average appreciation of 9-12%. Without any other factor, real estate (commercial and residential) is expected to rebound in the next 3-4 months. We take a look at the positive impact this will have on the commercial real estate landscape in India over the long term.

(The author is president of NAREDCO Maharashtra. The opinions expressed are personal.)

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