With investor interest in the residential segment declining because of limited property price appreciation and inability to monetise assets, real estate investment trusts (REITs) can provide a better investment option. Rating agency Crisil, in its report on India's REIT Opportunity, stated on Thursday that the top 10 commercial real estate developers and operators in the country can raise as much as Rs 1.5 lakh crore through REITs route by monetising 184 million square feet (msf) assuming a capitalisation rate of 8.5% and stake dilution of 75%.
Crisil said these assets, with annual lease rentals of around Rs 17,000 crore, represent around 30% of Grade A properties across major micro markets in the country. "We believe portfolios with annual rentals of over Rs 1,000 crore, translating into a minimum asset valuation of Rs 10,000 crore, can absorb higher transaction costs and comply with regulations, and are more likely to use this option," said the report on REITs.
REITs, which invest primarily in completed, income-yielding real estate assets, are similar to mutual funds, and can be listed and traded on stock exchanges. There are multiple advantages of REITs for both investors as well as developers or private equity (PEs). For investors, REITs offer steady returns, capital appreciation opportunity and low ticket size of investment. While for developers, it can help them to monetise the portfolio of operational assets and unlock capital and deleverage the balance sheets.
At present, only Embassy Office Parks REIT is listed on the exchanges and has given returns of 28.6% since its listing in April this year. While, the BSE Realty index is down by around 7% for the same time frame. In the past few years, profitability has improved for commercial assets given low vacancy rates and consistent improvement in rentals and developers with lease rental portfolio have embraced multiple alternative modes of funding, while deleveraging their balance sheets in recent times.
"This is evident from the fact that out of almost Rs 75,000 crore of PE investment in the sector in the past three years, as much as 70% has been parked in commercial and retail portfolios of developers. This has had a positive bearing on the credit profile of such assets, with the credit ratio well above 1.0 time for the past three years," the report said.
The positive trend is expected to hold across cities going forward as well because vacancy levels for Grade A offices are in a low-to-moderate range across cities. "This will work in favour of commercial lease rentals, which, we believe, are likely to escalate at 5-10% per annum over the next two-three years," the rating agency said.