Emerging REITs: Re-defining Indian Realty

 

Emerging India REITs

DLF, Unitech, Parsvnath, Ishaan, Hirco could be key beneficiaries

 

India REITs:

We highlight a fast-emerging and defining trend in the India Property sector, REIT-like structures called business trusts (BTs), which, we believe, could be

the key sector theme in 2008.

 

Background:

In simple terms, real estate investment trusts (REITs) are funds that own and operate investment properties, such as offices, shopping malls, and industrial zones, to generate rental income ( i.e.,yield-based investing) for dividend distribution. REITs

are non-existent in India given the lack of regulatory framework, less evolved property market for investment assets, and captive/strata-based ownership.

 

The demand drivers for India REITs

now are 1) significant scale-up in construction of investment properties by the prominent property developers, 2) the willingness of these developers to sell these properties given their capital needs to expand business, 3) the

possibility of a much higher realization by selling overseas (through interest rate arbitrage), and 4) the emergence of Singapore as a venue for listing BTs given its well-developed regulatory framework, low interest rate regime, and precedence of the recent AIT listing.

 

Regulatory stance:

India's FDI policy prohibits foreign capital in investment assets. However, SEZs and off-shore-held properties may not fall under FDI rule.

 

Who will benefit

: India's leading developers of commercial, retail, and hotel properties, including DLF, Parsvnath, India Bulls, and Ishaan will likely benefit, we believe. BTs sponsored by these developers will help them achieve higher asset turnover at attractive

valuations and keep their balance sheets asset light.

 

The precise impact on NAVs and earnings can be evaluated as and when the details are made public.

 

Singapore Realty

has several such examples of REITs by developer companies including CapitaLand (CapitaCommercial, etc.), Keppel Land (K-REIT), Ascendas (Ascendas India Trust, and Ascendas Trust), and Ascott.