The real estate market has long been a promising investment avenue valued for its stability and potential for growth. However, high capital requirements and continuous maintenance costs make direct investment in real estate challenging for many individuals.
Real Estate Investment Trusts (REITs) are reshaping the current landscape by democratizing and opening up access to real estate investments in a way that was previously out of reach for everyday investors. In India, REITs have transformed the way investors participate in high-value properties without the need for significant upfront capital. Projections by CBRE state that the market for Small and Medium REITs in India could exceed $60 billion (USD) by 2026, indicating a new era of real estate investment possibilities. ” But how did we get here?
Understanding What Are REITs and Their Origin
REITs is an investment vehicle that allows individuals to invest in income-generating real estate assets without the complexities of direct property ownership. They work similarly to mutual funds, where they pool money, allowing multiple investors to participate in large-scale real estate investments and receive dividends. 4
A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances real estate properties that produce income across various sectors, such as commercial properties, residential buildings, and industrial spaces.
As a concept, REITs originated in the USA in 1960 when Congress passed legislation allowing individuals to invest in diversified portfolios of real estate. This decision was made with the aim of democratizing access to real estate investments, similar to how mutual funds operate for stocks.
The Different Types Of REITs
There are several types of REITs, but all of them fall into three primary categories that focus on a specific investment strategy. The three categories are:
1. Equity REITs
2. mREITs/ Mortgage REITs
3. Hybrid REITs
At the moment, there are only equity REITs in India.
How Were REITs Introduced In India?
The concept of REITs was well-perceived post its introduction, especially in Asian countries like South Korea, Thailand, Taiwan, Malaysia, and globally. Asia as a continent went from having 31 REITs across six countries and regions in 2005 to 223 REITs in 11 countries and regions by 2022.
REITs were introduced in India in March 2019. Since then, the country has embraced it as an investment vehicle, and as of 2024 we stand at four operational REITs in India: Embassy Office Parks REIT, Brookfield India Real Estate Trust, Mindspace Business Parks REIT, and Nexus Select Trust.
The Growth Of REITs In India
The REIT market has grown exponentially over the past few years and continues to gain momentum since then. Currently, the REITs in India are only present in 11.7% of the total real estate market, compared to 98.9% in the USA and 95% in Australia [1], highlighting its significant untapped potential.
As of September 2024, the IRA (Indian REITS Association) has stated that REITs in India have accumulated over ₹1,40,000 crores in Assets Under Management (AUM), a combined market capitalization of over ₹90,000 crores, and an enormous portfolio of 125 million square feet (M sf).[1]
What Is Next For REITs In India?
The future of REITs in India looks bright as the four listed entities aim to increase the number of REIT-owned properties nationwide while striving to achieve various sustainable certifications.
Growth Potential
The Indian REITs Association (IRA) according to their primer estimates an approximate 4x M sf growth opportunity in Grade A REIT-able Office Stock in India. At the same time, they estimate an approximate 7x M sf growth opportunity in Grade A REIT-able Retail Stock in India. [1] This substantial increase in available properties is expected to enhance overall REIT returns in India, as more high-quality assets become available for investment.
Introduction Of SM REITs
With the introduction of SM REITs India by SEBI in March 2024, CBRE states the potential market for SM REITs in India is over 300 million sq. ft. of completed commercial office space, with an additional 50 million sq. ft. expected to be completed by 2026.
Fractional ownership of SM REITs is also a framework introduced with SM REITs, where multiple investors can co-own high-value commercial properties with a minimum investment of just ₹10 lakhs.
According to CBRE, the following cities have the potential for SM REITs
- Mumbai: ~75 million sq. ft. of completed stock with ~10+ million sq. ft. upcoming by 2026
- Delhi-NCR: 70+ million sq. ft.
- Bengaluru: 50+ million sq. ft., with growing interest from seasoned investors and support from experienced financial consultants in Bangalore guiding clients on maximizing REIT opportunities
- Hyderabad: 30+ million sq. ft.
SEBI has also set a minimum asset value requirement of INR 25 crores (approximately $3 million) for SM REITs, significantly lower than the previous threshold of INR 500 crores for traditional REITs. This change aims to make real estate investment more accessible to smaller investors, especially with SM REITs being required to be listed on recognized stock exchanges, ensuring transparency.
A New Era in Real Estate Investment Accessibility
The emergence of Indian REITs has revolutionized the real estate investment landscape by making it more accessible to everyday investors. With a current market capitalization exceeding ₹90,000 crore and assets under management surpassing ₹1.4 lakh crore, REITs are poised for significant growth, particularly with the introduction of SM REITs. As demand for commercial real estate continues to rise, they are set to play a pivotal role in shaping India’s economic future.