11th January 2017 - REITS - the possible impact on Indian Real Estate
Embassy – Blackstone had tied up sometime ago in what was to be the very first REIT to hit the Indian real estate market in Bangalore. Otherwise there was news of Blackstone tieing up with DLF to start a REIT. Formal structures, initiation and policy implications for REIT's in India still seem to be unclear.
I believe REIT's will have a superlative impact on the market particularly commercial real estate (offices). REIT's should see both interest from what were traditionally ardent residential segment investors as well as commercial segment investors. The ticket values that go into these investments will be typically smaller than those required for investing in real property so I do see reasonable levels of interest despite us being in the down cycle currently.
REIT's will be formed through an SPV consisting of private equity players and institutions co-partnering with developers who own commercial properties mostly and offering a fixed return on their investments over a period of years and also a rental yield to investors.
It seems inevitable that a lot of high end residential investors will park their money in REIT's in order to diversify their portfolios of investments. Commercial investors too will invest. The composition of REIT's should be mainly commercial properties as service apartment investments will be likely few and far between.
What will the impact be on capital prices? Tough to say, one may see a correction in office capital values across different segments in tier 1, 2 and 3 cities. Rentals should remain unaffected as the office leasing market has real end user driven robust fundamentals.
On the other hand prudent commercial office space investors may just decide to hold onto their properties for long, particularly those owning spaces of above 3000 - 5000 sq. ft.
Will we see a rush for more REIT's forming in the near future is a tough question to answer given the unpredictability and diverse nature of Indian real estate. Time and economic fundamentals will tell the story. However REIT's are a step to a formalisation and increasing transparency based market structure. Watch this space for more!
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