Indian commercial real estate offers investment opportunity worth USD 43 – 54 billion (INR 2,88,758 crore-INR 3,60,948 crore) across thetop 8 cities via REIT-eligible ready stocks as per RICS and Cushman & Wakefieldreport entitled “Commercial Real Estate: Steering Growth in Indian Cities”.The report was released at RICS Real Estate Conference 2016 – “Commercial Real Estate: Corporate Catalyst” with Cushman & Wakefield as research partners for the conference. A key focus of the conference discussions was evolving occupier demand, REITs and international standards.
The reportestimates that the value of REIT-eligible stock is seen to be the highest in Bengaluru (USD 15.8 billion )/INR 1,05,213 crore)primarily due to the high volume of investible Grade developments. Mumbai (USD 14.5 billion/INR 96,461 crore)comes a close second due to higher capital values of commercial properties, despite having roughly half of Bengaluru’s REIT-able stock. The estimated value of REIT –eligible stock in NCR is USD 11.04billion / 73,423 crores which is the third highest. Further, it is estimated thatapproximately 315 million square feet (msf) ofoffice inventory is eligible for REIT across the cities. The REIT-eligible inventory includes existing non-strata sold Grade A inventory, wherein Bengaluru, Mumbai and Delhi-NCR cumulatively account for over 67%.
Delivering the keynote address, Ms. Barnali Mukherjee, Chief General Manager, Securities and Exchange Board of India (SEBI), said – “We have come out with the IPO guidelines for the issuance of units of INVits. On same lines, we are working on the IPO guidelines for units of REITs. Since there are no accounting standards for REITs and INVits, we have set up sub-committeeslooking at the financials to be brought out with the offer documents as also the continuous disclosure to be made;also set up a sub-committee for issuance of valuations, who will come out with their report. On the valuations side, a separate chapter has been included in REIT regulations where lots of rights and responsibilities have been given to the valuer who has to comply with International Valuation Standards.
We have already received 4 applications for infrastructure investment trusts (INVits), where two applications have been processed and two are registered. We have come out with amendments on REIT regulations to bring more clarity and make it more acceptable but as of now, we haven’t received any applications for REITs. Whatever SEBI could do has already been done, in terms of removing key roadblocks such as capital gains tax and DDT and now we are looking forward to applications for REITs so that the REIT market can take off.”
Sachin Sandhir, Global Managing Director – Emerging Business, RICS said “Commercial real estate is expected to see continued demand, fueled by positive business sentiment (especially in IT/ITES and new age digital businesses) based on major policy reforms undertaken by the Government. There is also likely to be considerable international investor interest in income yielding assets and the first REIT’s and Invit’s are not far away.REIT’s will drive the need for Indian commercial real estate to speak the language of international investors which, in turn will create demand international standards and corporate governance; professionalism and skills – which are all the things that the RICS Stands for.”
Sanjay Dutt, Managing Director, India, Cushman & Wakefield said“REITs can provide a huge opportunity for developers and investors in India given the potential in the Indian real estate market. REITs would help developers resolve their fund-raising issues and allow them to focus on completing their projects in a timely manner. Apart from the top 3 cities, Chennai and Pune have immense scope for REITs with approximately 34 msf each of REITS-eligible stock. Going forward, by the end of 2017, Hyderabad’s REIT-able stock is expected to reach approximately 41 msf. This would place Hyderabad’s REIT-able stock at 4th place, surpassing that of Chennai and Pune. With investor and occupier interests rising in Hyderabad, a high number of Grade A projects are likely to be completed enabling high REIT-able stock.
Apart from the office sector, the retail sector too has high potential to generate rental income for investors. Since last year, private-equity firms have shown interest in investing in malls in India, indicating that there is acertain attractiveness in the retail shopping centre space owing to future prospects.”
Sachin Sandhir further added, “RICS will continue to work to promote International Property Measurement Standards (IPMS) a global collaborative initiative with 70 global professional bodies, which will bring in a common basis of measuring assets. RICS is also advocating International valuation standards (IVS) and the RICS red book as a basis for valuations of these REITABLE assets. With a common basis of measurement and a common basis of valuations and skilled professionals to undertake delivery of grade A office space coupled with ease of doing business initiatives of the Government, Indian commercial real estate will surely realize its true potential.”
Devina Ghildial, Managing Director – South Asia, RICS says – “2016 looks to be a bright spark for commercial real estate. The asset class looks to be on solid footing with all the policy reforms and initiatives from the Government. The industry will see the emergence of not only REIT’s and Invit’s but new asset classes including new suburban business districts which will propel commercial real estate to produce a lot more grade A office space in the times to come. In fact, in Q1 2016 alone, the market has seen absorption to the tune of approximately 5 msf.
Going forward, we will also see corporate occupiers and investors starting to demand international standards and focus on creating sustainable assets, which will create long term value for international investors in the form of higher yields. This would be a key expectation from the development community. Now more than ever, the potential of commercial real estate is apparent, and this makes it an opportune time for REITs to find their way into the market.”
Of the REIT-eligible stock across the 8 cities, Bengaluru has over 100msf of REIT-eligible stock (33% of total REIT-able stock), more than double of that of Mumbai.Approximately 75% of the total (all grades) office stock in Bengaluru is eligible for REIT investments. Delhi-NCR (56 msf) and Mumbai (51 msf) are expected to follow Bengaluru in terms of REIT-able stock as of Q1 2016.REITs once implemented in India wouldenable investors to generate a stable source of income and also earn profits by trading the units of REITs, thereby increasing the attractiveness of REITs as investing medium. With the government exempting Dividend Distribution Tax (DDT) for Special Purpose Vehicle (SPV) of REITS in the Union Budget, the investment vehicle is likely to be more attractive for investors.
MALL STOCK OF 39 MSF ELIGIBLE FOR REIT INVESTMENT IN INDIA
The top 8 cities have REIT-eligible mall supply of approximately 39 msf, with Bengaluru, Delhi-NCR and Mumbaitogether accounting for about 64% of the retail inventory. Owing to the presence of large mall developers in Delhi-NCR, Mumbai and Bengaluru that operate some of the best malls in India, investors are likely to concentrate their investments in these cities. Mumbai (11 msf) has the highest stock of REIT-able malls i.e. non-strata sold grade A malls followed by Delhi NCR (7.4 msf) and Bengaluru (6.5 msf).
The entry of higher number of foreign brands over the years would likely spur the requirement of quality malls in major cities. Going forward, there is over 25 msf of malls space that is currently under construction across the eight cities and is expected to get operational by 2018. These malls would provide investors with an array of investment options in the retail asset class.
HIGH PRE-COMMITMENTS SEEN IN MARKET
Overall, the commercial office space is witnessing high pre-commitment levels in the last couple of years. Companies in sectors such as IT-ITES, Pharmaceuticals & Healthcare sectors are signing-upspace for future take-up, amidst limited quality grade A supply in select locations. During the year 2015, pre-commitment levels across the top 8 cities were witnessed at 11.8 msf, a 9% increase over 2014 levels; and a 71% increase from 2012 levels. In Q1 2016 alone, 4.6 msf of pre-commitment were witnessed, with Bengaluru and Hyderabad leading the way.