India emerges as global hotspot for commercial real estate investment
REIT (Real Estate Investment Trust) investors in the country can look forward to higher returns as foreign investors are now more easily able to raise their money and also draw on their international expertise in managing such trusts. In its recent budget announcements, the government has made it easier for foreign portfolios and institutional investors to participate in Indian REITs by relaxing the legal requirements for leverage.
The REIT, which allows retail investors to invest in commercial real estate, is more of a new financial trust in the Indian context, but many fund managers and even overseas portfolio investors (FPIs) and overseas institutional investors (FIIs) have gained immense experience and expertise in overseeing business operations of such trusts in the past three to four decades for which these institutions exist in developed countries.
International experience in operating REITs
Now these FPIs and FIIs will be able to enter the REITs market in India and bring their expertise to managing the affairs of REITs to take the graph of returns on such trusts to the next level. Not only will this improve the returns for the unitholders or unitholders from the investment, but it will also give Indian fund managers a better grip on the complexities and nuances involved in running such trusts.
There are many pension funds in the western world that have committed to providing certain minimum returns to contributing retirees or members, but cannot achieve such returns in their own countries. They have been looking for ways to maximize their returns to a level where they can maintain the minimum percentage payout they have promised members. This also includes certain sovereign wealth funds. Such a situation has occurred in some Asian countries like Japan, where the return of pension funds or sovereign wealth funds is lower by investing in their own countries. These funds can invest in India and generate significantly higher returns in order to meet their obligations.
Win-win for everyone
Such funds have already invested in REITs in their own countries for the past few decades and have gained the crucial experience in running the show through board positions and other major appointments in REITs. In recent years, however, commercial property returns in their own countries have been dwarfed by commercial property returns in some of the fast developing countries like India. Hence, it is a win-win situation for them and the Indian investors who will win through better and more professional management of REITs affairs.
“Global investors are now looking for better returns in India, and many international funds are venturing into commercial real estate investments to that end. They bring quality experience in running shopping malls, offices and other commercial properties that are more efficient with global best practices, ”said Achal Raina, COO of Raheja Developers.
The return on investment (ROI) of commercial real estate can be 4% to 5% in the best US markets. On the other hand, in India it will be 7-9%. In some exceptional locations and assets, the ROI in India can be up to 13%. India now has significant inventory of Class A office space and vacancy rates have consistently been below 15%. This is a hallmark of a thriving market for high potential office space.
“The mosaic of commercial real estate in India has changed radically in the past few years with better architecture and adequate business transparency. This attracts many international investors to India. These investors make an important contribution to the professional management of commercial real estate assets due to their global commitment and rich experience, ”said Uddhav Poddar, MD, Bhumika Group.
Three REITs became a reality in India
The REITs scenario is heating up in India. The first was the Embassy Office Parks REIT, listed in 2018. Mindspace Business Parks REIT and Brookfield Real Estate Investment Trust have now also made their debut. These REITs are doing very well. In fact, Embassy REIT is already the largest REIT in Asia.
“The youngest REITs in India have already worked together abroad. Now that governments allow FPIs and FIIs to invest in debt from REITs, there will be more such investments that will only make the REIT management scenario more professional and help operate such trusts to meet global standards, ”said Dr. Ashish Bhutani. Bhutani Infra.
The net absorption of Class A office space in India was astounding to say the least. Net absorption hit 46 million square feet in 2019, one of the highest in the world. Even during the pandemic-hit year 2020, the net absorption was 25 million square feet. There is every possibility that net absorption will exceed 30 million square feet in 2021.
“With a strong economy and a thriving corporate sector, India will add more Class A office space in the years to come than likely any other developing country. The past few years are a testimony to this. The global investor community has no choice but to add India to their investment portfolio as the returns here are great, ”said Manoj Gaur, CMD, Gaurs Group.
“India has outperformed some of the best markets in terms of ROI in commercial real estate. These global investors are also comforted by the fact that the listing standards of REITs in India are the strictest compared to the global scenario and that SEBI carries out enough checks and balances, ”said Kapil Kapur, Director Sales, Strategy and Business Development. Bullmen Realty.
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