Global hotspot! How and why India is emerging as top destination for commercial real estate investment

Investors of Real Estate Investment Trusts (REITs) in the country can look forward to higher yields as the foreign investors will now be able to put in their money more easily and also pitch-in with their international experience in the management of such trusts. The government, in the Budget announcements, has allowed easier participation by foreign portfolio and institutional investors in the Indian REITs by way of easing the statutory debt funding requirements.

REITs, which allows small investors to invest in commercial real estate, is a rather new financial trust set-up in the Indian context but many fund managers and even many foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) have gained immense experience and expertise in overseeing operations of such trusts in the last 3-4 decades for which these set-ups have been around in developed countries.

International experience in running REITs

Now these FPIs and FIIs will be able to enter the fray in the Indian REITs domain and lend their acumen and experience in managing the affairs of REITs, taking the graph of the yields from such trusts to the next level. This will not only enhance the share holders or the unit holders’ returns from investment but also give an opportunity to the Indian fund managers get a better grip on the complexities and nuances involved in the running of such trusts.

There are many pension funds in the western world which have committed to provide a certain minimum returns to the contributing pensioners or members but are not able to generate that kind of yields in their own countries. They have been looking at opportunities to maximize their returns to a level where they can sustain the minimum payout in terms of percentage they have promised to the members. These include certain sovereign funds also. Such a situation has arisen in some Asian countries also like Japan where the returns from investment for the pension funds or sovereign funds are lower through investment in their own countries. These funds will be able to invest in India and get significantly higher returns to be able to meet their commitments.

Win-Win for all

Such funds have already been investing in REITs in their own countries in the last few decades and have gained the critical experience in running the show by way of board positions and other key appointments in REITs. However, in the last few years, the returns from commercial properties in their own countries have been eclipsed by yields from commercial assets in some of the fast developing countries like India. Hence it is a win-win for them as well as the Indian investors who will gain by way of better and more professional management of the affairs of the REITs.

“Global investors are looking at India today for better yields and many international funds are venturing into the commercial real estate investment for that purpose. They bring with them quality experience in running malls, office spaces and other commercial properties more efficiency with the global best practices,” said Achal Raina, COO, Raheja Developers.

The return on investment (ROI) from commercial properties can be 4-5% in the best of markets in USA. On the other hand, the same will be 7-9% in India. In some exceptional locations and assets, the ROI can be as high as 13% in India. India now has considerable stock of Grade A office space and the vacancy levels have consistently been less than 15 %, hallmark of a thriving and high-potential office-space market.

Three REITs become reality in India

The REITs scenario is heating up in India. The first one was the Embassy Office Parks REIT which listed in 2018. Mindspace Business Parks REIT and Brookfield Real Estate Investment Trust have also made their debut now. These REITs are performing very well. In fact, Embassy REIT has already become the largest REIT in Asia.

“The recent REITs in India have already seen some foreign collaboration. Now with the governments allowing FPIs and FIIs to invest in debt securities of REITs, there will be more such investment which will only make the REIT management scenario more professional and will help the operations of such trusts meet global standards,” said Ashish Bhutani, MD, Bhutani Infra.

The net absorption of Grade A office space in India has been astounding, to say the least. The net absorption touched 46 million square feet mark in 2019, one of the highest in the world. Even during the pandemic stricken year do 2020, the net absorption was as high was 25 million square feet. There is every possibility that the net absorption in 2021 will be over 30 million square feet.

“With a strong economy and a thriving corporate sector, India will add more of Grade A office space than probably any other developing country in the coming years. The previous years are a testimony to that. The global investor community is left with no choice but to include India in its investment portfolio as the returns are great here,” Manoj Gaur, CMD, Gaurs.

“India has out-performed some of the best markets when it comes to ROI in commercial real estate. These global investors are also comforted by the fact that the REITs listing norms are the strictest in India as compared to global scenario with enough checks and balances put in place by SEBI,” said Kapil Kapur, Director Sales, Strategy and Business Development, Bullmen Realty.