India’s real estate industry witnessed a massive shift in the past decade, from traditional finance to an era of structured finance, private equity, and public offerings. Foreign investors, including global PE majors, have shown keen interest in India’s real estate market owing to its strong economic fundamentals, high potential for prolonged growth, and favourable demographics. As the share of structured funding in real estate investment grew, the introduction of alternative investment vehicles in the sector became the next logical step.

The introduction of Real Estate Investment Trusts (REITs) in India was first proposed in 2007, with initial draft guidelines being released by the Securities and Exchange Board of India (SEBI) in December 2007. Since then, there have been amendments and fresh introduction of guidelines for this segment. These continued developments led to us identifying 10 critical success factors for REITs in the country in 2016—covering three key aspects: regulation, market performance, and investors. Our projection that the investment vehicle would soon be a reality in India materialised in April 2019, when ‘Embassy Office Parks’, a joint venture between real estate development firm the Embassy Group and global private equity major Blackstone, listed the country’s first REIT.

Overall, the government as well as SEBI have been quite pro-active when it comes to easing the REIT route for investors in India. The guidelines have been constantly amended to pave the way for further REIT listings. Some of the latest ones include:

* Widening of the ‘strategic investors’ definition to include mutual funds and insurance companies.

* Reduction in trading lot size from ₹1 lakh to ₹50,000; SEBI is also considering to open REITs to retail investors by relaxing the ₹50,000 barrier as well.

* Promoters owning 25% of voting rights now allowed to increase their stake by up to 10%, against 5% previously.

* Exemption from income tax on dividends for investors, if the SPV of a REIT does not opt for the concessional tax rate.

India’s dynamic investment landscape, continued faith of investors in Indian real estate, and sustained government support have resulted in the strong performance of Embassy Office Parks REIT. At the time of the issue, the IPO was oversubscribed by 2.57 times, to raise ₹4,750 crore. The REIT also distributed ₹531.7 crore to its unitholders for the quarter ending March 2020 and ₹1,880 crore for FY20. The REIT’s share price grew by 10% in more than 15 months since its listing (between April 1, 2019 and July 17, 2020), compared with the BSE Realty Index which contracted by 25% during the same period.

The current investment scenario and its impact on REITs

As business sentiments gradually improve during the unlock period, decision-making processes—which were previously delayed—have slowly restarted. Liquidity remains available as conservative financing continues, and private equities hold abundant dry powder. This was evident from a survey we conducted in May 2020, which analysed current investor sentiments as well as expectations in end-2020. In the short term, most investors said that they were looking to either delaying decisions or prioritising income security. But by end-2020, we expect heightened focus towards assets with quality tenants and more stringent due diligence procedures for investment.

Moreover, the future of office spaces remains bright despite the growth hurdles caused by Covid-19. According to CBRE’s 2020 Global Occupier Sentiment Survey (conducted in June 2020), the importance of a physical office space is likely to remain intact. 38% of respondents said that the physical office space will remain as important, if not more. Additionally, 70% of the survey respondents were also confident about setting long-term real estate strategies amid the pandemic.

In India as well, the sentiment towards office space remained positive, visible via EOP REIT collecting 95% rent in April 2020. Therefore, investors are likely to continue to consider REITs as a stable income generator in the long run, given that India’s office sector has traditionally witnessed high occupancies backed by long pre-existing leases and lease extensions from corporates. Currently, less than 10% of ready-to-move-in space is available in top micro-markets across cities due to previously higher pre-lease quantum. Going forward, despite the pandemic, we believe that India’s abundant advantages are likely to remain intact. This would be backed by the abundance of skilled and low-cost talent, supportive export-oriented policies, extensive regulatory backing to the IT /ITeS sector and average rental at a dollar.

What does the future hold?

The optimism surrounding the success of India’s first REIT led to preparations for the launch of the second one in India—Mindspace Business Parks REIT, backed by K Raheja Corp and Blackstone. With a total leasable area of 29.5 million sq. ft., the office REIT portfolio is spread across Mumbai, Hyderabad, Pune, and Chennai. The ₹4,500-crore IPO was subscribed 13 times and was listed earlier this month.

Going forward, the REIT landscape in India is likely to further evolve to include varied asset classes in the medium- to long-term. The outbreak of Covid-19 has accelerated the adoption of cloud-based services, as well as advancements in Big Data, Industry 4.0, and the Internet of Things (IoT)—which would amplify the demand for data centres. While the office sector is expected to remain integral in the next few REIT listings in the country, the asset mix of REIT portfolios could thus also see some modifications as developers may add essential facilities such as data centres.

Further, the country could also see an industrial and logistics REIT in the coming years, as the sector is likely to see the entry of mainstream global and domestic players introducing quality space over the coming quarters. There is merit for a potential public sector REIT in the long term, given that several PSUs could potentially unlock their land holdings by monetising their assets. Ultimately, we believe that a healthy balance sheet, a strong management team, and a well-planned portfolio would enable future REITs to tide over near-term uncertainties and ensure long-term success.

Views are personal. The author is chairman and CEO-India, South East Asia, Middle East, and Africa, CBRE.

Follow us on Facebook, Twitter, YouTube & Instagram to never miss an update from Fortune India. To buy a copy, visit Amazon.