REITs and the Future of Commercial Real Estate Investment:

A prominent worldwide institution, the Real Estate Investment Trust (REIT), was launched in India a few years ago to encourage investment in the real estate industry by monetizing rent-yielding properties.

REITs became a big splash in the Indian market at the opportune time. The industry predicted that the investment vehicle would soon become a reality in India. 

Although Covid-19 has negatively influenced real estate over the past five quarters, there was a strong demand for pent-up and new commercial properties for seven months between the first and second waves.

REITs will boost the business sector:

With the introduction of REITs, the commercial sector may see greater capital appreciation than the residential sector. The establishment of REITs is advantageous not just to investors but also to developers. It has the potential to increase the value of developers’ commercial properties. They might use REITs as a vehicle for exiting at a very favourable capitalization rate, decreasing their high level of indebtedness.

The property will provide capital appreciation and income to the investors without requiring them to acquire and maintain it. It will make real estate more accessible to many investors, particularly those wishing to participate in the affordable housing sector. Commercial real estate is predicted to do firmly in India in the coming months.

Prospects for REITs:

With the availability and efficacy of a vaccination, driving the rate of improvement, commercial real estate and REITs are expected to begin to rebound. REITs fared well during the epidemic because of their steps to enhance their financial situations. 

As stores and businesses reopened, the condition gradually improved. The sectors that had been directly touched by the shutdowns, lodging/resorts, retail, and diversified REITs, saw the most recovery.

We cannot anticipate the flow due to the uncertainties around Covid-19, but we can confidently state that there is a need for commercial office space, notwithstanding work from home.

 It will be critical to discern between the pandemic’s short-term or transient effects and long-term or permanent alterations to commercial real estate markets. Despite the numerous challenges posed by the Covid-19 epidemic, the future of workplace spaces remains bright.

According to reports, the situation has improved as the worst of the second Covid-19 wave has gone.

The instant success of India’s first REIT prompted preparations to create the country’s second—Mindspace Business Parks REIT. According to CBRE’s 2020 Global Occupier Sentiment Survey, the value of physical office space is expected to stay stable. 38% of respondents, physical office space will be as vital as in the future, if not more crucial. Furthermore, 70 per cent of poll respondents felt confident in developing long-term real estate plans in the face of the pandemic.

Given that India’s office sector has generally had strong occupancies backed by long pre-existing leases and lease renewals from corporates, investors are likely to continue to see REITs as a dependable income producer even in the long run. The three REITs are projected to do well in terms of appreciation over the long run. In the past, investors in areas like Mumbai got an average return on investment of 6%. The rental yield is expected to be approximately 6-7 per cent for commercial premises. Even in short-term investments, the data is projected to stay static.

The Indian market has recently seen two successful REIT offerings, Embassy Office Parks and Mindspace REIT, totalling Rs 9,250 crore. Amid the epidemic, Blackstone and Brookfield announced India’s two most significant real estate purchases, totalling over Rs 25,000 crore. The most recent Brookfield REIT IPO was eight times oversubscribed. This provides the industry with insight into the sector’s long-term prospects.

The initiative has established a precedent for India’s commercial real estate market in openness, depth, and liquidity. The enhanced competition and transparency resulting from a thriving REIT market will improve asset upkeep and operation. A more established and professional REIT industry, mainly through attracting institutional and retail investors, is projected to extend the real estate investors pool significantly.

The gain over the next three years might be rather excellent for investors. The sector has suffered greatly in the previous two years. However, in the future years, the real estate industry will grow at 9-12 per cent on average. With no other factors influencing the market, real estate (commercial and residential) will likely recover in the next 3-4 months. We investigate the good long-term influence on India’s retail real estate environment.

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