The Indian property market's democratization - allowing access to all - can be considered beneficial. The SEBI regulations for ‘mini’ REITs (real estate investment trusts) achieve just that.
The establishment of a framework for small- and medium-sized REITs can make real estate investments more accessible Under the new regulations, it will be mandatory for trusts to have a minimum asset value of 500 million rupees, down from the earlier 5 billion rupee ceiling. Additionally, the minimum investment amount is set at 1 million rupees.
A broader market
REIT regulations were introduced in India in September 2014. However, these financial instruments have until now underperformed due to a stagnant commercial property market. Moreover, the Covid pandemic made the situation worse for the office market.
The REIT instruments, generally favoured by prominent real estate developers and investors, were not accessible to smaller players until now. With the new regulations, smaller players will have the opportunity to utilize this financing method to expand their footprint. It will not only formalize the flow of capital into commercial real estate for these entities, it will contribute to enhancing the quality of future supply.
REITs pool money from many investors to invest in income-generating real estate properties. By reducing the minimum ticket size to Rs1 million, the new regulation will potentially increase the number of investors. The portfolio of properties will become more diverse for investors. It is expected that REIT will be allowed in the residential segment too, which otherwise was concentrated on commercial real estate.
This will make real estate transactions easier. More retail investors will be able to enjoy the rental income most transparently.
It will further democratize the markets, making them a profitable opportunity. The trend will also give rise to a robust secondary market for these assets.
What needs to be done?
There is a need to weed out challenges and make way for more structured REITs in the country.
With rental offices remaining the primary focus of REITs, an oversupply of these spaces could pose a challenge to intended growth. In the current scenario, the market needs to check the excess supply position. Hence, developers need to bring in new supply based on actual demand.
According to a recent Colliers Report - ‘REITs- gaining larger ground in Indian Real Estate - the future holds tremendous potential. REITs already account for an impressive 11 per cent (74.4 million square feet) of overall Grade A office stock in the country with an additional unrealized potential of 57 per cent, equating to about 380 million square feet of incremental REIT-able office space.
The majority of the potential stock is concentrated in the secondary business districts (SBDs) of the Top 6 Indian cities.
As per data, H1-2023 saw 22 million square feet of new supply across these six cities, registering a 31 per cent rise during Q2 2023 compared to the first quarter. Colliers anticipates a growth of 10-20 per cent in supply in H2-2023. While this supply looks market-linked, an excess would prove detrimental.
To address potential challenges in the future resulting from economic and social factors, it is crucial for developers and landlords to expand their range of tenants. Not all sectors will be affected simultaneously, so developers should consider incorporating occupiers from different domains, rather than solely focusing on the BFSI and IT/ITeS sectors.
By adopting this strategy, they can mitigate risks associated with market fluctuations.
As the market matures and evolves, we can expect the REITs in India to expand and contribute significantly to the overall growth of the economy. The favourable market conditions, regulatory reforms, and increasing investor awareness make it an attractive investment avenue.