First REIT listing expected to take place only in 1H2017
Shobhit Agarwal, Managing Director - Capital Markets, JLL India
India 04 August 2016: As the market awaits the first listing of a real estate investment trust (REIT) in India, we look at the potential market size of REITs expected to get listed in India versus the percentage of REIT-compliant market size of some leading countries in Asia Pacific. The study revealed that the percentage is way higher in India than what prevails in countries across APAC.
India’s Grade-A office space universe is in excess of 464 mn sq ft of which about 25% – valuing approximately USD 18 billion – is expected to get listed by 2019. While industry expects anywhere between 25% and 100% of the Grade-A office space in India to get listed under REITs, we believe expecting anything above 25% is more optimistic than realistic.
Even 25% of the office space listing under REITs is higher than what is seen across APAC. Singapore comes closest to India’s lowest expected percentage at 19%, followed by Australia at 13%, Hong Kong at 11%, Malaysia at 8%, New Zealand at 4% and Japan at 3%. However, what needs to be seen here is that most of these APAC markets are already mature. The size of market in these countries is much higher than that of India.
Source: JLL Capital Markets Research
The percentages may also tell us something about the average age of office buildings in these countries. India is currently seeing a lot of new construction and hence, the average age of office buildings is lesser across Indian cities compared to Australian cities and Hong Kong. As the Indian REIT market matures and its size expands, we expect the percentage to align with that of mature markets.
The size of institutional real estate (in USD billion) across all these countries (see box above) shows how Japan stands way ahead with its institutional real estate size being USD 2678 bn followed by Australia (at USD 656 bn), Singapore (at USD 241 bn), Hong Kong (at USD 211 bn), Malaysia (at USD 84 bn) and New Zealand (at USD 73 bn). India’s size, on the other hand, will be around USD 72 billion.
In terms of REIT market cap, India will stand around USD 18 bn, even if 50% of the REIT-compliant office space were to get listed. This is lesser than most APAC markets where Australia leads at USD 85.15 bn followed by Japan at USD 72.46 bn, Singapore at USD 45.47 bn and Hong Kong at 23.8 bn. Malaysia and New Zealand have a REIT market cap of USD 6.77 bn and USD 2.92 bn respectively.
Market dynamics
In India, 120 million sq ft of office space is under construction currently, which includes office space that is expected to be completed between 2016 and 2020 across seven cities. Thanks to recent relaxations, the prospects of REITs will improve as they can consider under-construction assets too. Earlier, only leased office space was going to come under REITs.
Also, commercial developers, who require funding during the under-construction stage, would be able to get funding through equity now instead of high-interest debt. The Modi government had taken measures to help REITs become a reality earlier this year too. The dividend distribution tax (DDT), which was a hurdle in the way of successful REIT listings, got exempted.
Big funds such as Blackstone, Phoenix, Brookfield, DLF and Raheja, which have a sizeable portfolio of quality leased/ leasable assets were expected to launch REITs this year. Now, the first REIT listing is expected only in 1H2017.