India office REITs - Off to a great start

The listing of REITs in India has provided a mutual fund-like investment option in real estate. Traditionally, retail investors resorted to direct investment in the real estate space with challenges, which are addressed by the introduction of listed REITs in the recent years. REITs provide diversification across asset classes and geographies, an opportunity to invest in real estate properties in smaller denominations through organised and formal platforms, lower transaction costs, tax savings, easy liquidity and access to professional expertise coupled with transparency and accountability.

Greater transparency, liquidity and robust rent-yielding asset portfolios of Indian REITs have been successful in attracting global capital as witnessed in the previous three listed REITs. While REITs have been driven by India’s strong office demand and positive outlook, it is time to see more REITs being introduced across other asset classes such as retail, logistics, hospitality etc. Policy measures have supported the REIT market to thrive and with over 50% of India’s Grade A office stock considered REITworthy, we anticipate the market to grow further.

In India ~10% of the total Grade A office stock is under REITs - indicating a huge potential for REITs as the market moves towards maturity. Of the current four listed REITs, three are primarily commercial office assets led. Their market capitalisation is a small fraction of the total available REITworthy commercial office opportunity. Grade A office markets in India account for the largest share of institutional investments till date. The office market is estimated to provide an investment opportunity of USD 59-63 billion through the listing of new REITs.

Other real estate asset classes that offer stable rental yields, such as industrial warehousing, retail malls, serviced co-working, co-living spaces and hospitality, are on the radar of established REIT players. Diversified REIT offerings could offer the right mix of risk-reward to potential players and investors. 2024 may witness the listing of approximately 60 mn.sq.ft of REITs under logistics and warehousing. Grade A warehousing stock in the top eight cities of India stood at 161mn sq ft as of year-end 2022, with 40% being backed by institutions/funds. The warehousing and logistics sector has seen renewed interest from investors, and it would be amplified if these assets are listed through the REITs/INVITs route. India also witnessed its first retail REIT IPO in May 2023 from Blackstone-sponsored Nexus Select Trust to raise USD 400 million (INR 3200 crore). The Issue received a robust response and was oversubscribed 5.4 times. It was also listed at a premium to the issue price.

Retail space across the top seven metros and prominent Tier-2/3 cities provides an additional opportunity of 65-69 mn sq ft of potential REITworthy retail assets² in existing malls. As most global funds have created platforms with key retail developers, this segment is ripe for new listings. With quality supply in the pipeline and new malls announced by established developers, the Indian retail sector is expected to attract more institutional investment.

The REIT market in India is a growing adolescent. However, the speed and direction with which India may move through the various stages of market maturity will find its own normal. Growth in the REITs market will help increase the depth of Indian real estate through a sound regulatory framework, which ensures transparency and high governance standards and thus increasing global investor interest.