What are some of the challenges in managing REITs in India?
REITs are permanent capital vehicles that rely heavily on the financial markets to finance growth. In developed markets like the US, REITs can easily raise equity and debt at will.
Indian REITs are able to access equity markets and have the best reputation in the real estate sector, but the capital markets for Indian REITs are still developing. For equity, we need to issue a prospectus and run a process like an IPO. It is a slow equity capital formation process in India, so REITs have to be extremely judicious about raising equity to fund growth.
Additionally, debt costs are also higher than established REIT markets such as the US, Singapore, Japan and Australia. India has always had a nominally high interest rate environment. We currently fund at around 8% to 8.5%, while other REITs in mature markets, even in an elevated interest environment, fund at around 5% to 6%.
It speaks to the pedigree of Indian REITs that despite widespread volatility and evolving markets, our access to capital remains strong, and the reputation of REITs has enabled us to raise debt capital at perhaps the lowest margins in the industry.
The other big challenge is obviously investor awareness. There is a common perception that REITs are quasi-debt instruments similar to bonds or fixed deposits and completely unrelated to equities. In fact, they are simply high dividend-paying stocks with economic cycle exposure, and equipped with ample growth levers such as rent appreciation, incremental growth and the ability to boost growth through acquisitions. That’s how we run our business, and that’s what we’re constantly telling our investors and other stakeholders, such as our lenders and regulators.
The newly formed IRA will play a key role in working with regulators and both debt and equity investors to deepen capital markets, as well as educate stakeholders on REITs. Both are top priorities for the IRA.
What are the catalysts driving India’s REITs?
We believe the market for Indian REITs will remain open, cost of capital will remain low and distributions will increase.
We are entering a new investment environment for India. The growth factors we are seeing in sectors like office and retail, coupled with the continued flow of money by Indians into financial asset classes, are already finding their way into REITs.
The benefits of the REIT structure for a country like India, with its growth rate, are immense and far outweigh the near-term costs. For asset owners, as we’ve seen, they have created tremendous value, sustainable capital vehicles that can and have access to the markets, and they have grown over time.
For investors, REITs provide organization and transparency to a previously fragmented and chronically illiquid commercial real estate sector. Investment in office assets is driven by fractional ownership, which is opaque, low on disclosure and very difficult to exit.
Apparently, Indians also love dividends or distributions. The idea that commercial real estate can pay 7% to 8% dividends has driven the growth of retail investment in the asset class quite rapidly.
In India, we have received a lot of praise from global investors for creating a REIT structure that allows investors to invest quite easily. Our investor universe spans global mutual funds, sovereign wealth funds, global pension funds, endowments, hedge funds among others. Domestically, our shareholder registers include domestic mutual funds, insurers, family offices and 200,000 retail investors who are continuously adding exposure.
In some ways, a successful REIT regime is a litmus test for a country’s capital markets and financing regime, and I think India’s governance passes that test successfully.
Despite market dislocations, the discipline with which REIT managers run their businesses quarter after quarter has been a huge boon for investors. There is a real sense of satisfaction in institutionalizing the asset class and creating a real estate product that this country so desperately needs.
Do you see the Indian REIT market as an alternative to China?
Structurally, both India and China are very different REIT markets. Indian REITs cater more to the office and retail sector, while China’s REITs have a greater focus on infrastructure, with warehousing, toll roads, industrial parks and public utilities being the mainstay of the REIT universe, although we understand that this includes: There is so much more. Consumption-oriented mandates such as shopping malls and supermarkets have been approved. Infrastructure trusts (‘InvITs’) of India hold some of these C-REIT infrastructure mandates.
Indian REITs have performed quite resiliently, and both office and retail are sectors that are performing well. The Chinese property sector is clearly volatile at the moment, and C-REITs have not been immune to the selloff being experienced by Chinese developers.
Which other sectors can become REITs in India?
Currently, only offices and malls can offer permanent rent. Over time, we expect this to change, but for now the near-term bet will still be on office and retail.
The office sector in the US is growing due to remote working. Is this trend affecting India’s office REITs too?
India’s young demographic dictates the importance of physical office space, which has become more pronounced in the last two years. Offices are extremely important for young professionals as they provide opportunities for culture, careers and collaboration. The age of the average Indian employee in office parks is between 25 and 35. Many people live with their parents or in shared accommodation in an environment that is not conducive to working from home.
Moreover, office rent in India is very cheap compared to developed office markets. Major Indian office markets like Bengaluru or Mumbai run $1 to $4 per square foot per month, while Singapore, Hong Kong and New York can fetch rents in the double digits.
So, while hybrid still exists, it cannot be thought of as an alternative to office. We are seeing more and more senior managers asking employees to return to the office. Physical occupancy levels in cities are increasing from 60% to 70%, and we believe this will continue to increase.
What do you think the role of the IRA should be?
The IRA was formed to mirror what Nareit does for US REITs. We are very small in our membership and scope, but we continuously work to streamline the regulatory regime and we provide the best platform for investors to better understand REITs and build a well-rounded portfolio of financial assets.
Nareit estimates that 170 million Americans have exposure to REITs, based on approximately 350 million people. We have a population of over 1.5 billion, and even if you take half the investable class, it’s still twice the size of the entire US population – of which only a tiny fraction are actually investing.
The financialization of India’s savings from bank deposits and physical assets is only going to increase. There is a huge pool of untapped new capital entering the market, and we are ready to take advantage of it.
