The entry of real estate investment trusts (REITs) in the Indian market is expected to infuse a large dose of liquidity into the cash-strapped commercial real estate sector and could be a game changer.
In India, of the estimated 350 million square feet of ‘Grade A’ office space — valued at around $65-70 billion — concentrated in the major urban centres, about 80-100 million sq. ft is estimated to be eligible for REITs in the next 2-3 years, valued at about $15-20 billion, according to KPMG in India.
Apart from these, there are a host of other commercial properties such as shopping centres, retail malls, among others, which are eligible for REITs.
Retail malls in particular had seen developers rush in and churn out malls all over the country, but the rising vacancy rates following the economic slowdown saw a slowdown on the supply of mall space. An improvement in consumer sentiment now is good news for organised retail.
“The overall vacancy rate today stands high at about 20 per cent in retail malls across major Indian cities, while superior grade malls have vacancy rates averaging at only 10 per cent,” said Suvishesh Valsan, senior analyst (Research & REIS), JLL India, a real estate consultancy.
JLL India estimates that six million sq. ft of mall space will be added in 2014.
Given that international retailers will prefer to take up space in these malls, the shortage of quality space is evident, and will be felt for some time. REITs, in order to provide attractive yields, have to buy assets at a reasonable price. While upcoming superior grade malls will offer lucrative investment opportunities, some existing lower grade malls could be up for sale at a discount. “For instance, of Mumbai’s 65 existing malls, only 20 are of a size suitable for securitisation in a REIT. Of these, five or six could be considered distressed assets,” Mr. Valsan said.
