The first ever REIT in United States was created to allow average investors to invest in a managed portfolio of real estate assets. Since then, REIT has evolved as the only public equity platform with long term patience capital, which derives most of their earnings from property income, with a smaller portion coming from capital appreciation, rather than complex business structures and revenue models.
While initially REIT consisted of mortgage companies as portfolio (largely known as ‘securitization’), it was only in the early 80’s when real estate assets became an integral part of it. The idea was to give a hybrid class of investment to retail and institutional Investors combining equity-like returns, income potential and diversification benefits.
In contrast to the basics, the primary reason for India to relook at REITs was its ability to provide alternate capital with long term sustainable funds to the industry, which was neglected over a decade by traditional lenders, investors and platforms. While Indian banks have been sporadic in financing Real Estate industry, recent signs of turnaround in the nature of capital coming into the sector in shape of risk capital is a welcome ‘green shoot.’ What REITs can now provide is an exit to the Risk capital infused by Developers and Private Debt through public markets.
It would be myopic approach incase market forces including developers, lenders and regulators look at REITS only as a mechanism to de-leverage and exit. We need to rethink the pitch and focus on REITs being a completely new asset class and a natural hedge over inflation. In an economy with a stable or reducing interest rate, growing GDP and improving employment like ours, REITs work effectively as it offers Alpha over risk free investments. What is noteworthy is that although in the beginning REITS may only have pre-leased offices as an underlying asset, in the long terms it does diversify and support creation of other social infrastructure including multifamily apartments, health care, regional malls and shopping centers and industrial which is of great importance to our nation.
What would become challenging is the creation of a superficial platform with sub-par volumes and turnover in transactions and shallow float for public investments. The success would not just count on the nature of first Indian REIT with right assets, sponsors and Investment managers; but largely on its acceptability by retail Investors and investment advisors as a distinct and new class of Investment. Investor awareness is the key to long term successful creation of REITs platform, which would lead to Globalization of a Localized Asset Class- Real Estate.
The article is authored by Somendra Sarwal, Associate Director, Capital Markets and Investment Services, Colliers International India