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The Trouble with REITS…Making on the Carry is fraught with danger, but India has the answers

Two Loans don’t make a REIT: you need more than that to make this vehicle fire on all cylinders because the problem with REITs is they’re especially vulnerable to fluctuations in short-term interest rates. The Real Estate Investment Trust (or REIT for short) comes complete with a range of tax incentives and a market model equivalent to a publically traded Mutual Fund, but whatever the fiscal advantages might be the REIT Industry worldwide is now heavily debt dependant: a paradigm example of Keynes’ warning that all unstable markets are inherently speculative. Debt finance predominates over equity as REIT Managers increasingly struggle to attract short term funding to meet construction costs, often years before the asset itself has generated a single penny in income.

Born in the challenging economic conditions of 1970’s North America, REITS grew up, as bankers say, “making on the carry”: entering into dozens of short term loans over the construction phase of the project in the hope this would carry it over to completion, because only on completion would there be anything to pay the loans back with. Two thirds or even three quarters completed, an apartment block is not only virtually worthless on the balance sheet, but it also won’t be generating any income either. In the months and years of construction, there’s no cash flow at all, and any volatility in interest rates can prove catastrophic with all those rolling interim loans falling due.

And to add to the danger, any long term rise in interest rates will also make it harder to find tenants or buyers for the completed property: each of them finding their rental and mortgage deals more difficult to find and fund as the market tightens, and If that happens the capital value of the part completed property can spike sharply downwards making the project’s core finance and all those back-to-back loans (all that making on the carry) more expensive still… and it can all happen in a heartbeat.

Timing is everything and timing means interest.

When it last met in December the Bank of England’s Policy Committee decided to hold interest rates at their historic low of 0.5% by a vote of six to three, but perhaps tellingly Andy Haldane (the Bank’s Chief Economist) decided to switch sides and support a rate hike. And fragile as the UK economy is, with zero growth over the last quarter of 2019, a rise in interest rates now looks more likely as the Bank looks to protect sterling in an ever more volatile post Brexit environment. UK REITS on the carry won’t view that prospect with any equanimity…

But things couldn’t be more different in India where the Reserve Bank delivered five straight cuts in interest rates last year: an aggregate reduction of 1.5% over the year leading to a 5.1% December close. Distant memories of the subcontinent struggling with a rate of 14.5% in 2000 are just that…distant memories. And my word how this progressive reduction in rates has born fruit for India’s freshly minted REIT industry.

India’s first-ever REIT was listed in 2019 and created an immediate feeding frenzy among external Funds, including Nikko AM- Straits Trading, North Carolina Fund and Sentry Global: each of them struggling to elbow the others out of the way to get a piece of the Blackstone backed Embassy Office Parks. Following its debut in March 2019, the Embassy Fund rocketed in value by 35%, going on to report a 15% increase in operating revenues over the final quarter of last year and then distributing a whopping $65 Million to Unitholders. Perhaps, unsurprisingly in that light, Bengaluru based Prestige Group has also now signalled its intention of seeking a REIT listing to monetise part of its office portfolio (reported to be projecting $12.9 Million in exit rental income) and RMA, Godrej Properties, as well as Pune based Panchshil Realty, is also on the prowl. 

That’s the difference a favourable and stable interest rate environment can make, and its why commentators are now forecasting that over the next three years REIT Funds on the subcontinent will raise $25 Billion, listing some 150 million square feet of rent yielding properties in the process.

Find out more about Modulex 


Modulex Construction is the World’s largest and India’s first Steel Modular Building Company, working to meet the opportunities of India’s real estate markets in a practical and focussed manner. It was established by Red Ribbon to harness the full potential of these fast-evolving markets and deliver exciting opportunities for investors: because, when it comes to investing in property on the subcontinent, nobody knows its markets better than Red Ribbon.

Executive Overview

The subcontinent’s real estate markets are being driven forward by an unprecedented population growth on the subcontinent which will soon make it the most populous nation on earth: rapidly expanding and increasingly urbanised, India’s new middle class has more to spend than ever before and a roof over their head is usually top of the wish list. So I’m not surprised to see the Reserve Bank so anxious to create the fiscal conditions in which its newly created REIT industry can thrive.

And goodness me how it’s thriving…

But there’s more than one way to meet this pent up demand and avoid the dangers of REITS being forced to take on the carry, and that’s to minimise the all too lengthy and too often perilous lead-time between breaking ground and completion of a traditional construction project.

Modular Construction doesn’t make on the carry at all…

It doesn’t take years to plan and deliver, it costs less than traditional construction techniques and it delivers much more quickly and reliably no matter how challenging the externalities might be. There’s virtually no chance of a Modular Project remaining uncompleted.

Suchit Punnose

Suchit Punnose / About Author

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