India REIT: A Potential Investment Window

Whilst REITs have existed globally since past 60 years and are a USD 2 Trillion asset class currently, India saw its first REIT in April 2019 when Embassy Office Parks REIT IPO (for ~33 million sq. ft.) got listed on the Indian Stock Exchanges and paved way for retail investors to participate in the Commercial Real Estate sector.

REITs enable investors with returns through stable rent-yielding cash flows (with 90% of the earnings distributed to unit-holders) and capital appreciation. Interestingly, while All REIT Index in the US outperformed S&P 500 by ~440 basis points over 20 years, India’s only REIT has outperformed equity markets by ~2000 basis points in the last 5 quarters since launch.

India has approx. 650 million sq. ft. of Grade A Office space of which, 310-320 million sq. ft. is REIT-able stock. India’s office stock would touch 1 billion sq. ft. in the next 6-8 years and in next 2 years, nearly 100 million sq. ft. is expected to be listed on Indian Stock Exchanges. Therefore, the asset class presents itself with tremendous opportunity and growth to all class of investors.

In the more recent times, COVID-19 pandemic has impacted everyone globally and the CRE market is no different. REITs and CRE market, in general, may feel pressure on rental cashflows in the short term as tenants seek rent waivers/ deferments or alternatively look at renegotiating lease contracts/ vacating the premises due to their financial instability. However, given that India continues to be top IT outsourcing destination globally due to the availability of talent pool, cost arbitrage and high quality infrastructure, commercial real estate will continue to be a resilient, low risk and high return asset class.

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