REITs can solve the funding problem of commercial developers

Some well-known, sophisticated investor REITs have helped developers to improve liquidity and raise capital by unlocking their assets’ value.

Nov 23, 2020 09:11 IST India Infoline News Service

The Indian real estate sector is just emerging from the COVID-19 impact. Many number-game pundits had predicted severe liquidity crunch, but then, just in the middle of the lockdown, the Mind Space REIT (Real Estate Investment Trusts) was oversubscribed by 13 times over, and the strategic retail investors started all over again. And now, more REITs are coming our way, offering a funding lifeline for investors to pump in some much-needed money into the market.

But what makes REITs such a plum promise?

The truth is, global investors have been eying India’s burgeoning commercial real estate market for a while now. The Blackstone-Embassy REIT (2019) sent out a positive wave to many global investors and also opened up brand new investment avenues for many domestic retail investors. So, one successful REIT was all it took to cause a ripple effect on the entire realty sector, which also reaches the asset classes. This is what REITs do – they pool together investors’ capital to purchase commercial real estate assets, also allowing for it to be traded on major stock exchanges. This, in turn, leaves banks free to open up new projects by reducing loan exposures. For commercial developers, this is a win-win situation!

Reasons why REITs are great for developers and investors alike

REITs are the best bet for the Indian commercial real estate developers at the moment, providing them with a viable funding alternative. Some well-known, sophisticated investor REITs have helped developers to improve liquidity and raise capital by unlocking their assets’ value. For developers facing a cash crunch such REITs are a boon, literally. While the investors can get their worth, the developers get a chance to exit the property when it is at its peak value, and reap maximum ROI. The other advantages are:
•  REITs allow even smaller investors to add commercial real estate to their portfolio because they often come with a low entry point – which is equal to lower investment.

•  Since it’s mandated that 80% of the REITs listings should be of rent-generating assets, they are mostly unaffected by market instability of other investment options such as the stocks, mutual funds, FDs, etc.

•  REITs offer smart returns with minimal risks– the projected ROI is pegged between 12% and 14% in the long term.

•  For the developers – parking funds in premium property markets enables a growth in the rent of these listed properties.

•  REITs offer deal transparency and are a good option for investors with small real estate appetites

On the other hand, for the developers, it all combines into a large ticket – this enables them to divert funds to highly cost-intensive commercial real estate market. Last year, the success of the Embassy Parks REIT saw global investors increasing their stakes in many commercial assets across India, so as to get themselves listed under REITs in future. In the clamour to invest in the Indian real estate market using the REITS vehicle were Japan’s NikkoAm Straits Trading Asia, Taiwan’s Eastspring Investments, North Carolina Fund from the US, Malaysia’s Hwang Asia Pacific REITs and Infrastructure Fund, and the Canada-based Sentry Global. And this truly helped the market tide over the COVID-19 lull quickly.

It is because of REITs’ capacity to solve the funding issues of developers that it has become so popular in the global real estate scenario so quickly. And though REITs was introduced in India only a few years ago, making many investors wary of it initially, it has now begun to attract investment by showing off its power to monetise rent-yielding assets. REITs is now helping the Indian realty developers unlock their assets and enable retail participation.

The author of this article is Divaker Bhalla, CEO, DNA Ventures Pvt ltd
Published as received

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