India's REIT boom: Top 5 factors that could propel penetration from 16% today to 30% by 2030

India’s Real Estate Investment Trust (REIT) market is steadily progressing from a “nascent” to “early growth” stage, with close to 140 million sq ft of real estate assets, including office and retail spaces, already getting listed. The REIT penetration in the office market could hit 25-30% by 2030, up from current levels of 16%, with REITs' potential to unlock an additional 371 msf of Grade A office space, according to Colliers’ latest report, “REITs Unlocked: Accelerating India’s Real Estate Maturity”.

Rising demand from Global Capability Centres (GCCs), along with space uptake by technology & BFSI firms, is driving occupancy levels. "This in turn is expected to accelerate the growth of office REITs in India,” says Badal Yagnik, Chief Executive Officer, Colliers India, adding that for developers and investors, SBDs offer a massive opportunity. Moreover, participation of retail investors has also been fuelled by the REITs' diversification into different asset classes. "With strong fundamentals in play, 25-30% of the overall office stock in India can potentially come under REITs by 2030," says Vimal Nadar, Senior Director & Head of Research, Colliers India.

Let's try to understand the key factors that could propel India's REIT market towards deeper penetration.

1. The four listed office REITs -- Embassy Office Parks, Mindspace Business Parks, Brookfield India Real Estate Trust, and Nexus Select Trust -- currently encompass close to 133 million sq ft of Grade A office space. Additionally, about 371 million sq ft of office assets, accounting for about 46% of the existing Grade A stock, can potentially come under future REITs, says the Colliers’ report. Across India's top 7 cities, Bengaluru tops the chart, with the bulk of additional REITable stock with a share of 24%, followed by Hyderabad at 19%.

2. Existing REITs also have around 34 million sq ft of under-construction supply, which will likely become operational in the next 1-2 years. The key driver of this trend is the office sector. New listings, broadening of occupier base and growing institutionalisation could also help increase the overall REIT penetration.

3. At a micro market level, about 223 msf or 60% of the additional REITable office stock falls within secondary business districts (SBDs) of the top seven cities in India. Again, Bengaluru leads with a share of 36%, followed by Hyderabad at 29%. While the additional REITable stock is mostly concentrated in SBDs and peripheral business districts (PBDs) of major cities, about 14% of Grade A buildings in central business district (CBD) localities could be turned into future REITs.

4. There is a huge improvement in tenant quality, which has increased the overall occupancy levels and the average rentals of properties under REITs, as shown in the data. Showing strong operational performance amid global uncertainty, the office REITs claim occupancy rates exceeding 86% as the demand for premium office spaces remains robust. Steady rental income growth, long-term leases and high tenant retention have boosted the overall credibility of REITs.

5. Despite seeing strong growth, the overall REIT market in India is still relatively smaller compared to other global markets, which only shows India has a huge potential to expand REIT far beyond office spaces to retail malls, industrial warehouses, hospitals, residential apartments, data centres, etc. Currently, Japan and Singapore are relatively established REIT markets in the APAC region. The REITs/InvITs market in India is relatively smaller in scale, but there's huge potential to scale to newer asset classes beyond listed office, retail and warehousing portfolios. Interestingly, SEBI has been championing the case for Small and Medium Real Estate Investment Trusts (SM-REITs) in recent years.