50% of Indian Office Stock Qualifies for REITs

Shobhit Agarwal, MD & CEO – ANAROCK Capital

  • About 50% of India’s total office stock is REITable – up from 30% in 2 years
  • Low returns, lack of sound rental policy eliminated residential’s REITs candidature
  • Projected 5-year returns on commercial assets are 14%

The listing of India’s first REIT by Blackstone-backed Embassy Group has been in the offing for quite some time, but it now finally appears that it will be listed within the first half of 2019.

As REITs await their official deployment in India, investors hoping to cash on this new avenue for generous ROI growth seek to understand what exactly is in store for them – and for the real estate market.

As with any other investment platform, REITs have their own nuances and also issues, especially in the Indian context. Obviously, the industry at large has a lot of skin in the game as REITs promise to be a major inward-facing funnel not only for foreign institutional investments but also considerable individual investments.

If the first REITs are indeed announced in H1 2019, it would certainly not happen too soon for an industry still caught in the prongs of an unrelenting liquidity crunch.

There could not be a better time than this for foreign and domestic investors to pump funds into the real estate market via REITs.

FIIs Gear Up for the REIT Plunge

2018 saw large foreign institutional investors like Japan’s NikkoAm-Straits Trading Asia and US’ North Carolina Fund, among others, receive SEBI approval to invest in India under REITs.

Several FIIs had already ‘conquered’ India’s equity markets in the past, and now it is the turn of the real estate market via REITs.

It is not only the timing that is right, but also the stance that FIIs have assumed for real estate plays in India. Most of them are patient investors focused on stable long-term returns which will hopefully exceed those they could expect in their own countries.

Nevertheless, whether Indian REITs will indeed be an unequivocal blessing to foreign and domestic investors still remains to be seen.

As things stand now, India’s REIT environment is not really a faithful emulation of that of developed international markets like Singapore, UK, Canada and Australia.

How India REITs Compare Globally

In those countries, REITs are a market-proven model that has withstood the test of time and produced very attractive returns for their investors. Globally, REITs have responded quite favourably to the evolving market dynamics.

Indian REITs hope to take a cue from their western counterparts by bringing in regulations in line with the globally recognized norms so as to maximize profits for REIT investors here.

In Canada, the average return for REIT investors was around 10% in 2017, while in the UK, it hovered between 8-10%. This average return is on all REITable assets including commercial and residential projects together.

In India, the projected five-year returns on commercial assets is an optimistic 14%, largely because Grade A commercial real estate has been on a protracted winning streak since 2017. Commercial real estate withstood the vagaries of the various reforms much better than the residential asset class.

In the US, smaller investors account for between 25-30% of REIT participation from the previous 50% about a decade ago. In India, we can reasonably start with at least 15-20% of participation by smaller individual investors.

All of this certainly bodes well for both FIIs and smaller investors focused on REITable commercial real estate – a space which has also benefited from the incumbent government’s efforts to improve the ease of doing business in India.

What Disqualified Residential from India REITs

However, residential real estate, the sector that is in greatest need of institutional funding, is not included under REITs while in developed global markets, residential assets are included under REITs.

This is obviously not without good reasons. Lack of a sound and inclusive rental policy in India is one of the major hurdles for REITs in the residential segment. Countries like Singapore and the US have a defined rental policy which makes it easier for them to host residential REITs.

Also, the yields on residential projects in India are nowhere near those of developed countries and mostly hover between mere 2-3% in the prime locales here.

In short, low returns coupled with the overall negative hype that has followed the Indian residential sector in recent years have thus clearly negated its candidature for Indian REITs – at least in the foreseeable future.

Another area of difference is the taxation structure currently being proposed for Indian REITs. Like in the more developed countries with successful REIT platforms, India too must offer a logical tax regime with a single point of taxation if they are to rise to globally comparable stature.

Commercial Spaces – Primed and Ready

From a pure industry viewpoint, India’s Grade A commercial real estate sector has certainly proven its resilience and ability to generate attractive returns. This is why NRIs and domestic HNIs have shifted their erstwhile focus from residential properties to commercial real estate.

Nor is this a passing ‘phase’ – commercial leased assets across cities such as Bengaluru, Mumbai, Pune and NCR are seeing steadily mounting interest from occupiers, and therefore also from investors. Demand for Grade A office space has been growing and vacancy levels have been sliding south in prime locales.

ANAROCK data also indicates that while commercial real estate supply across the top 7 cities in 2017 (post the disruptive reformatory changes of DeMo, RERA and GST) declined by 24% over the preceding year, 2018 saw a 21% jump in new commercial supply as against 2017.

Office space absorption remained steady with top 7 cities, witnessing an increase of almost 5% in 2017 as against 2016, and a 19% increase in 2018 as compared to 2017.

Data currently suggests that approximately 50% of the total office stock in India can qualify for REITs – a definite improvement over the 30% two years ago. Clearly, the market is gearing up for the launch of REITs by developing investable commercial assets.

At the end of the day, the success of Indian REITs will be basis growth prospects of a market that is still maturing, unlike developed countries (including in the Asia Pacific region) which are already mature.

India is currently seeing a lot of new construction, so the average age of office buildings is lower than in cities in Australia or even Hong Kong.

Endnote – Cause for Caution

Once REITs become an on-ground reality, the market must remain vigilant. There could be a major issue for Indian REITs if the supply of investment-grade office spaces does not keep pace with demand. If it doesn’t, we will see an asset bubble form in the short-to-mid-term.

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The NBFC Real Estate Crisis – What, Why and What Next?

Shobhit Agarwal, MD & CEO – ANAROCK Capital

  • NBFCs account for over 50% of total developer financing – close to INR 4 trillion in FY2018
  • Real estate has already exhausted over 75% of available credit
  • Consolidation of not only developers but also NBFCs on the cards

As an alternative to the main banking sector, Non-Banking Finance Companies or NBFCs have had few peers, which makes the perfect storm that has gathered around them now all the more worrisome.

What ARE NBFCs anyway?

NBFCs are financial institutions that are essentially engaged in the business of providing loans and advances primarily to retail customers. Unlike the formal banking sector, they cannot accept deposits from the public; they depend solely on wholesale lending and banks for their operations.

Two-wheeler loans, consumer durable loans, gold loans, vehicle finance and loan against property are the segments where NBFCs have a very strong presence across the country and enjoy a much larger share than the public sector banks.

Which Sectors Do They Fund?

After agriculture, the MSME sector is heavily dependent on NBFCs for loans and working capital.

Since banks cannot be present in every nook and corner of the country, NBFCs have capitalized on their highly localized presence to grow their business on the back of strong rural demand and the thriving SME and MSME sectors.

Their local network and understanding of customer profiles at a local level give them an edge over the banks when it comes to lending at the micro level. Due to these advantages, NBFCs could rapidly scale their businesses where the formal banking system was slow in lending.

Also, the rising Non-Performing Assets (NPA) crisis in the overall banking sector made banks reluctant to lend to the perceived riskier sectors like SME and MSME, thus helping NBFCs to gain market share. Real estate, also considered a high-risk sector, depended heavily on NBFC funding as well.

How Did The Current Crisis Play Out?

The ongoing liquidity crisis in the NBFC industry is the result of asset-liability mismatch (ALM). Since the NBFCs cannot raise retail deposits from the general public, they depend on wholesale lending for their capital requirements. As a result, the cost of funds for NBFCs is higher than that of banks.

The biggest error that the majority of NBFCs and HFCs committed with regards to the real estate sector is that they ventured into long-term lending to builders and also into underwriting loans with very long-term repayment tenures.

As a result, the NBFCs short-term borrowing was channelized towards financing long-term loans. They were heavily dependent on banks, mutual funds and private placements to meet their capital requirement as well as for refinancing of loans.

However, post the IL&FS default, banks and mutual funds have stopped refinancing the loans of NBFCs and also stopped the disbursal of sanctioned loans to them, since there is still no clarity regarding the spill-over impact of the IL&FS default.

How Bad Is The Situation For Real Estate?

NBFC loans to developers have seen a phenomenal rise since 2014, particularly due to the slowdown in bank loan disbursals. Interestingly, as per the current fiscal, NBFCs alone account for more than 50% of the total developer financing, which is somewhere close to INR 4 trillion in FY2018 as on date.

However, the recent NBFC crisis has clearly spelt intense gloom – if not outright doom – for Indian real estate. Nearly USD 34 billion of mutual funds debt in NBFCs and HFCs is maturing between Oct 2018 and March 2019.

Prior to the crisis, the sector was already dealing with a massive cash crunch and subdued demand, due to which more than 75% of the available credit facility was already exhausted.

With the rise in banks’ NPAs to INR 10 lakh crore (as on March ’18), up INR 1.39 lakh crore in a quarter, further funding from banks to NBFCs and HFCs (currently have an exposure to bank lending of more than 40%) seems extremely difficult.

The liquidity crunch has been a major pain-point for Indian real estate over the last two to three years owing to tepid sales, banks’ refusal to disburse loans due to rising NPAs and the widening debt-equity ratio even with the biggest developers. The recent NBFC crisis in September has only exacerbated the pain for the real estate sector and its major stakeholders – the developers.

Post the IL&FS crisis, some NBFCs even halted the disbursal of earlier sanctioned loan amounts to developers for fear of widening the funding crisis even further. The worst phase came when some NBFCs urged developers to return the money that was disbursed to them so that they can repay their dues.

As per the S&P BSE realty index data, the debt-equity ratio of the top 10 listed players (on a stand-alone basis) in FY 2014 ranged anywhere between 0.10 to 0.85 which has increased in the current fiscal to range anywhere between 0.17 to more than 1.

This may not seem overly alarming, but the situation is worse in the case of small and mid-size developers whose debt-equity ratio is much higher.

The major bailout option for most of these small developers is to possibly consolidate. It also needs to be highlighted that out of the approximately 10,000 developers in the country today, only 35-36 are listed. Hence, the financial numbers could be even worse.

What Next?

The Government’s consistent assurance of ensuring credit to NBFCs is some sort of a relief, particularly for skittish investors who started panic selling in the equity market post the IL&FS default.

Sensing trouble, even the RBI came forward to aid NBFCs by relaxing liquidity norms and allowing banks to lend more. Vey recently, the apex bank relaxed asset securitisation norms for the NBFCs in a bid to ease the persistent stress on the sector.

Thus, even while the RBI and the Government have taken steps to ring-fence the NBFC crisis and support its financing needs by providing additional liquidity to banks and credit enhancement for refinancing needs, there are speculations over spill-over concerns in the market in the near-term.

Only time will tell whether or not we feel this heat in the near term. However, one major outcome visible in the coming year will be the consolidation of several small NBFCs.

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ANAROCK Report Underscores Gujarat’s Thriving Economy, Housing Opportunities

  • Compact homes (area less than 646 sq. ft)see maximum traction in Vadodara
  • Surat’s residential market set to boom on the back of DREAM City

Ahmedabad, 26 October 2018: Gujarat’s real estate market presents a mixed bag of highs and lows, according to ANAROCK Property Consultants’ report ‘Gujarat – Land of Innumerable Possibilities.

As knowledge partner for the event, ANAROCK launched the report at the CII Realty & Infrastructure Conclave 2018 in Ahmedabad today.

Shobhit Agarwal, MD & CEO – ANAROCK Capital said, “Gujarat has attracted over ₹65,432 crores of FDI over the last 5 years, accounting for 5% of the total investments in the country. The state’s major real estate markets are largely stable, barring a minor price correction in early 2017 due to demonetisation. Smaller-sized housing units appear to attract the maximum demand overall, though Surat is a notable exception. While there has been fairly constant housing price growth in all segments since 2016, the maximum price rise in major cities of the state has been in the mid-segment.”


Housing Price Trends

Dinesh J. Yadav, Chairman – CII Gujarat State Council said, “We at CII are organizing the 1st Edition of Realty & Infrastructure Conclave 2018 for developers and builders based out in Gujarat. Understanding the current scenario, there are sufficient reasons to remain bullish on Gujarat’s real estate market, not least of all the state’s brilliant macroeconomic indicators. Gujarat contributes a massive 18.4% share to India’s industrial output, and the per capita income has increased from Rs. 87,481 in 2011-12 to Rs 1,56,691 in 2017-18. This accounts for an impressive annualized growth of over 12% during the period. Gujarat currently ranks 3rd in India in terms of per capita income. This bodes very well for its real estate growth story.”

Report Highlights:

  • Gujarat has 419 industrial clusters, which employ more than 17 lakh people. South Gujarat alone has 132 clusters employing more than 10 lakh people.
  • Ahmedabad is witnessing significant infrastructure growth. The main factors fuelling growth of the city are its proximity to DMIC & GIFT City and the proposed Ahmedabad-Dholera Special Investment Region.
  • In Vadodara, smaller homes (with area less than 646 sq. ft) are witnessing maximum price appreciation. Vadodara will also gain from DMIC passing through its borders.
  • Surat has seen a rapid increase in population, resulting in severe pressure on existing infrastructure and services. Nevertheless, the Diamond Research and Mercantile City (DREAM City) in Surat will fuel further residential development in and around Surat

Click here to download the report ‘Gujarat – Land of Innumerable Possibilities’

Image By Srikeit at en.wikipedia, CC BY-SA 3.0

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NBFC Crisis – Real Estate on Tenterhooks!

Shobhit Agarwal, MD & CEO – ANAROCK Capital

It may be true that ‘when the going gets tough, the tough gets going,’ but this doesn’t hold true for the Indian real estate sector currently. The ongoing NBFC crisis post IL&FS default has made things even more difficult for developers.

Post the banking system’s freeze on real estate funding due to rising non-performing assets, NBFCs and HFCs were the sole sources of funds for the cash-strapped developers. Now, however, NBFCs themselves are struggling and their loan disbursals to developers have slowed down significantly.

A source of broad-spectrum dismay and despair, the NBFC crisis needs to be resolved as soon as possible or the real estate sector’s much-anticipated recovery will be postponed by a couple of quarters more.

As a Credit Suisse report reiterates, NBFCs and housing finance companies (HFCs) have played a major role in credit supply in recent years, accounting for nearly 25-35% of the incremental overall credit.

While bank credit growth in the last two years averaged at a mere 7%, strong 20%-plus growth in NBFC credit aided overall credit expansion beyond 10%.

Free Falling

What began as a singular event with one of the biggies – IL&FS – failing to repay its commercial dues has blown up into a liquidity crisis for the entire NBFC spectrum.

As an immediate aftermath, NBFCs’ stocks went into free fall. The top 15 NBFC companies cumulatively lost over ₹75,000 Crore in just two initial trading sessions.

To say that this rattled investors would be a gross understatement, and the Government and regulators’ immediate efforts to rein in the panic failed to curb the sell-off tidal wave. Since 20 September, NBFC stocks have tumbled by more than 50% for DHFL.

The current NBFC crisis can have a cascading effect on the real estate sector’s growth forecasts, which were already nebulous on the back of the liquidity crisis created by rising defaults and non-performing assets in banks.

Deep Impact

  • The liquidity crisis plaguing NBFCs is likely to hit stake sale and fund-raising plans for these lenders in the near term. With real estate having a strong correlation to credit availability, it could be worse for already cash-starved developers. As per ANAROCK data, more than 5.75 lakh residential units are running behind schedule across the top 7 cities since their launch in 2013 or before. The major factor contributing to this delay is the liquidity crunch developers are experiencing to the backdrop of tepid sales.
  • Despite residential sales gradually picking up q-o-q, they are nowhere near their peak levels. With a substantial number of residential projects running behind schedule, the crisis could further exacerbate liquidity woes and impact project delivery timelines even more.
  • Some NBFCs like Indiabulls also provide home loans to individual homebuyers. With banks tightening their norms for lending to individual homebuyers in recent times, NBFCs were seen as the best alternative. Therefore, the ongoing NBFC liquidity crunch will also impact home loan approvals and disbursements, inevitably reducing residential property demand in the short-to-mid-term.

Apart from weak residential sales, increasing input costs and promotion expenses coupled with the high compliance costs will result in decreased earnings before interest, tax, depreciation and amortization margins.

Advantage Heavyweights

With most things being unequal in Indian real estate, the impact of this crisis will not be the same across the board.

Many listed realty developers such as Puravankara, DLF, Prestige Group, Oberoi Realty and Godrej Properties have well-diversified portfolios, including commercial and retail.

Many of these players have also reduced their debts and ventured into affordable or mid-income housing, where growth is currently the highest.

In the highly competitive real estate business environment, these players will, in fact, may emerge stronger as they are better equipped to ride the storm and continue to deliver while others can’t.

Large-scale consolidations are already ensuring that only the fittest will survive in the future, and this crisis will hasten the process.

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India REITs – Realty Gold Over Stock Market Blues?

The pros, cons and ho-hums about Indian REITs as they stand now

Shobhit Agarwal, MD & CEO – ANAROCK Capital

REITs are finally happening in India, and that’s good news. While real estate as an asset class has always attracted both small and big investors, other investment instruments – gold, stock markets, fixed deposits, mutual funds etc. – have also been a part of well-diversified investment portfolios.

However, most of these asset classes have come with not-inconsiderable risks in recent times. The value of gold has eroded visibly, mutual funds have responded sharply to the recent stock market downturns, and fixed deposit returns barely break even after taxation.

Investors are looking for investment avenues that provide them steady income with minimal risks and under professional management, ultimately ensuring a decent return on investment. It can safely be stated that REITs could not have made their appearance in India at a more opportune time.

Investment in commercial real estate is a highly capital-intensive affair. REITs are a very viable option addition to investment portfolios because they allow investors to participate in an asset class previously reserved only for the affluent few. Also, as is the case in developed nations, REITs provide very decent returns with minimal risks.

How REITs will Benefit Small Investors

Let’s look at what we have at the current time. The Blackstone-backed Embassy Group includes the income-generating SEZ and IT parks under its first REITs listing – potentially a highly lucrative proposition for small as well as big investors to get involved in.

Today, commercial real estate is doing exceptionally well in India, thanks to the aggressive expansion plans of both local and global businesses. Like mutual funds did for the stock market, REITs open a door to a potential treasure trove of returns to small investors – minus the downside of market downturns.

Stable rent-yielding Grade A commercial properties are high in demand with rentals seeing a steady increase. In sharp juxtaposition to the extremely volatile stock markets, Grade A office rentals will increase regardless of whether supply increases or decreases.

There just isn’t enough supply to meet all the demand for this type of real estate, because the locations that qualify Grade A office assets have limited growth capacities.

In short, demand will always outstrip supply – and as long as this remains so, returns from REITs can only be in the green. They are far less prone to risks and will deliver decent returns over the short-to-mid-term.

Some of REIT’s USPs

REITs offer various advantages to investors:

  • low entry point – as low as Rs. 2 lakh – effectively means that one can add real estate to one’s portfolio at a much lower investment.
  • The projected return on investments is anywhere between 8-14% in the short-to-medium term (post adjustment of the fund management fee), with minimum risks. REITs are far less volatile than the stock market, FDs, mutual funds and gold because regulations maintain that 80% of the REITs listings must be of rent-generating assets.
  • A lot of institutional capital is chasing the limited supply of investible Grade A office stock across top property markets. Therefore, the rents for these listed properties are very likely to rise steadily, and the contractual terms will be far more structured and transparent.
  • REITs guidelines maintain that at least 90% of the net distributable income after tax will be distributed to investors at least twice a year.

US, Canada, UK, Singapore and Australia are some of the countries with dynamic and flexible REITs markets that have proved to be highly lucrative for investors. For instance, in Canada, the average return was around 10% in 2017, while in the UK it hovered between 8-10%. The average return in these countries includes all REITable assets such as commercial and residential.

In India, REITs have currently been limited to commercial Grade A office spaces – however, the umbrella of ‘commercial spaces’ also covers retail. In other words, investors of varying investment appetites and capacities will actually be sharing in the profits of India’s best shopping malls.

Expected ROI – REITs vs other asset classes

Expected ROI - REITs vs other asset classes

Source: ANAROCK Research

On the Flipside

The success of REITs in India will largely depend on the benefits they offer to investors. Currently, there are a plethora of taxes that may make REITs unattractive for many. For instance, when a REIT sells shares of assets, the capital gains are taxable.

In contrast, in the UK where REITs have been operating for over a decade now, there is no taxation on income and gains from their property rental business. Instead, shareholders are taxed on REIT-related property income when it is distributed, and some investors may even be exempt from tax altogether.

Further, in other countries, there have been exemptions from the stamp duty, as well. If and when India provides these tax benefits to investors, REITs will become all the more functional and lucrative in the long run.

Also, if REITs are made more attractive for investors with such tax sops, the flood-gates of foreign funding into Indian real estate will open up in real earnest.

The Immediate Future

It will indeed be interesting to see the response to the first REIT listings in India. We do need to remember that, as is the case with any kind of real estate investment, the degree of their success depends heavily on a favourable macroeconomic environment backed by sound policy reforms.

To make the most of REITs in India and earn maximum returns, analyze the portfolio of projects included under the REIT. The analysis must include the stature and historic track record of the concerned entity, the developers’ portfolio, and the location advantages of the properties – including micro-market, IT Parks, and so on.

Effectively, a REIT will drive price appreciation at the lowest risk if it includes Grade A commercial spaces with minimal vacancy, located in the best business-centric micro markets, with established rentals and occupiers.


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RBI’s Move To Increase Credit Flow To NFBCs And HFCs

With the RBI’s move to increase credit flow to NFBCs and HFCs, the RBI has now made a proactive attempt to boost credit flows to NBFCs and it is a positive move per se.

Banks are already grappling with the problem of NPA, and have consciously reduced their exposure towards real estate. The current IL&FS crisis has further complicated the liquidity crisis in the system and every lender is taking extra precautions while disbursing capital to NBFCs and HFCs, including banks.

In the current background where real estate sales have been extremely slow and a substantial amount of projects are running behind schedule, banks might not be willing to lend to NBFc and HFCs. However, the NBFCs with strong track records might certainly get some respite from the banks.

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Indian Real Estate After RERA – Collaborate, Consolidate Or Exit

Shobhit Agarwal, MD & CEO – ANAROCK Capital

DeMo, RERA and GST struck at the very heart of the previously unregulated practices prevalent in the Indian real estate.

RERA, in particular, has been responsible for smaller and often unscrupulous developers taking a major hit not only in terms of existing business but future business viability.

This is largely because of the radical change RERA has enforced in terms of the ways in which real estate business must now be conducted.

From the need for verified documentation to the increased complexity of business operations and the compulsion to upgrade their billing systems, most smaller players were initially clueless about how to proceed.

Not surprisingly, Indian real estate post-RERA has witnessed major consolidation. Lower sales coupled with financial incapability also prompted several small-size developers to either exit or consider consolidation via mergers, acquisitions, and joint developments with organised bigger players.

Factors Prompting Collaboration or exit post-RERA

The elimination of pre-launches and the associated ‘rolling’ of funds collected from customers from one project to the other have come to an almost complete halt under RERA. This has exacerbated the liquidity crunch of smaller developers.

In fact, rising non-performing assets (NPAs), lower profits in the real estate sector and RBI labelling the sector as a high-risk business have made banks cautious about lending to developers.

Bank lending went down from 68% in 2013 to a mere 17% in 2016, and other sources of funding such as private equity, financial institutions, and pension funds gained prominence.

However, private equity players are now conducting thorough due diligence and investing only in ‘clean’ and viable projects by established developers with strong track records for compliance and completion. Under-equipped players, on the other hand, are finding it increasingly difficult to raise funds.

The strict penalty-clause for project delays under RERA is also daunting for many tier II and tier III developers. In fact, the stalled projects of some of these players will inevitably have to be sold on an ‘as-is’ basis to large developers.

To cut to the chase, large-scale consolidation of real estate assets and players is afoot, and very much on the cards in the foreseeable future as well.

This trend will eventually benefit consumers, as unscrupulous and financially undisciplined developers will be wiped out and buyers will get better products without the hitherto notorious delays, and with vastly reduced risks on their investments.

Consolidation in Commercial Real Estate

Major consolidation is not limited to the residential sector, though it has seen the lion’s share of consolidation moves.

Commercial real estate is also likely to follow suit. Increasing demand for Grade A office space, which is already seeing lowest vacancy levels across the top cities, is the prime reason for consolidation within this space.

Another emerging trend is the increasing demand of institutional investors, including private equity, sovereign wealth and pension funds for matured yield-producing assets in India, particularly in the commercial space.

Most of these matured and ready projects have established rentals and occupiers, for which the global entities are willing to write hefty cheques.

Besides bringing in much-needed governance into the commercial space, this new trend will make it more structured and transparent. Invariably, only the big developers will be able to survive this change.

The rising prominence of institutional investors in the Indian commercial space will also bring a change in the ownership pattern. Unlike earlier, this segment will no longer be driven by the whims and fancies of single owners.

With increasing demand for Grade A office space, rents will most likely see a steady rise and the contractual terms will become more structured. Besides, for developers who currently incur huge expenditure in commercial real estate – be it on land, construction or interior fit-outs – REITs can be a safe bet to exit the property and focus on their core area of developing.

Consolidation in IT Companies

Meanwhile, IT companies are shutting down small centres and consolidating their workforce in bigger cities. Several corporates including IT companies are reviewing their real estate strategies and monetising assets wherever possible.

Additionally, companies across sectors are firming up their relocation and consolidation plans and tenants are locking in large office spaces at favourable lease terms.

Notably, it is not just the IT sector that is seeing consolidation – it is equally evident in the BFSI and telecom sectors, as well.

To conclude

Despite the churn it causes, consolidation in real estate is inherently positive as it results in a more streamlined and customer-friendly landscape and also helps players to become more efficient and effective in conducting their business.

While the consolidation trend has been an ongoing phenomenon for quite a while, the recent policy upheavals have put this trend front and centre.

It is certainly an interesting trend which benefits the real estate industry as a whole by opening up multiple opportunities for companies, developers and real estate consultancies.

However, the fact that consolidation also involved the rather brutal elimination of few smaller players can, of course, not be ignored either. Like most change, this one involves a considerable amount of pain for the stakeholders involved.

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REITs – Serving Small Bites of the Large Real Estate Pie

Shobhit Agarwal, MD & CEO – ANAROCK Capital

India is waiting with bated breath for the first listings on its home-grown Real Estate Investment Trusts (REITs).

In fact, the first listing will happen within a couple months. REITs are good news for investors who have a small appetite – as small as Rs 2 lakh – and yet want to invest in the otherwise highly cost-intensive commercial real estate market.

With REITs, they can literally take a small bite of the large Indian commercial real estate pie.

One of the major real estate players in the country (Blackstone-backed Embassy Group) is in the process of launching its first REIT to raise approx. $1 billion as part of its strategy to monetize its rent-yielding commercial properties.

Currently, this realty major is in the reshuffling of its property portfolio to include assets across Bengaluru, NCR and Mumbai.

The company has more than 30 million sq. ft of leased office space and about 22 million sq. ft. more in the pipeline across cities. Another player in the fray for listing REITs is IIFL Holdings.

REITs Decoded

Just like mutual funds, REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns. As of now, REIT-listed properties are largely commercial assets – primarily office spaces – that can generate steady and lucrative rental income.

REIT-listed office assets are very likely to be followed by other REITable asset classes in India, including retail malls, hotels, etc.

Post its registration with SEBI, units of REITs will have to be mandatorily listed on exchanges and traded like securities. Like listed shares, small investors can buy units of REITs from both primary and secondary markets.

Thus, besides low entry levels, REITs will provide investors with a safe and diversified portfolio at minimal risk and under professional management, ensuring decent returns on investment. REITs will not only be characterized by investment in real estate assets – they will also offer limited liability for all unitholders.

To ensure regular income to investors, it has been mandated to distribute at least 90% of the net distributable cash flows to the investors at least twice a year.

That’s not all. As per the guidelines, 80% of the assets must be invested in completed projects, and only 20% will be in under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities.

Expected ROI

Small investors will raise a pertinent question – will REITs be able to offer the same returns on investment that they can expect from ‘real’ real estate investments? The answer is, probably not. Definitely, investors who are hoping for unrealistic returns (>20-30%) will need to look elsewhere.

Being realistic in one’s returns expectations from REITs is important. A realistic ROI expectation would be in the range of 7-8% annually, post adjustment of the fund management fee.

With REITs, the ROI will be highly structured, realistic and risk-averse. REITs are ideal for investors who want a steady income with minimum risks. Investors can earn two types of income from REITs – one through capital gains post the sale of REIT units, and the other via dividend income.

Moreover, REITs will be a good investment option for investors who are looking to diversify their portfolio beyond gold and equity markets.

The Downside

On the flipside, a plethora of taxes has currently made REITs more than a little unattractive in India. For instance, when a REIT sells shares of assets, the capital gains are taxable.

Further, in other countries where REITs have been functional for a long time have been exempted from stamp duty. Such tax benefits, if and when are provided in Indian REITs, will act as a catalyst in making REITs more functional and attractive in the long run.

More importantly, if REITs become attractive to investors via tax sops, channels for foreign funding in Indian real estate market will open up. The potential is considerable, but a proactive decision on the taxation aspect needs to be made.

Global Players Galore

Sensing immense opportunity, large global institutional investors are already eyeing India’s real estate market through REIT-tinted lenses.

These include Japan’s NikkoAm StraitsTrading Asia, US’ North Carolina Fund, Malaysia’s Hwang Asia Pacific REITs and Infrastructure Fund, Taiwan’s Eastspring Investments and Canada-based Sentry Global.

This ignited the interest of global entities is largely due to the uptick in office leasing activity in major Indian cities.

To be fair, the Government and SEBI have incorporated several changes time and again to make the issuance of REITs a success. However, only time and circumstances can reveal the ‘real’ success of REITs in India.

The first listing will be more of a test case for the Indian market. If it succeeds, there will certainly be no looking back.

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Indian Hospitality – Recovery Or Growth Track?

Shobhit Agarwal, MD & CEO – ANAROCK Capital

The Indian hospitality sector stands as the chief beneficiary of India’s burgeoning travel and tourism industry.

According to WTTC Economic Impact report of 2018, the travel and tourism sector’s total contribution to India’s GDP in 2017 was US$ 234 billion and is expected to touch US$ 492 billion by 2028 – an impressive compounded annual growth rate of 7%. This growth naturally fuels the Indian hospitality sector.

The Indian Government has taken due note of the massive importance of the travel and tourism industry and has formulated a structured plan to promote it in its sixth five-year plan.

The holistic development of India’s travel and tourism industry obviously calls for considerable support from the hospitality sector, which is extremely sensitive to economic cycles.

Indian hospitality cruises through peaks and troughs based on different factors – apart from overall economic performance, its health hinges on Foreign Tourist Arrivals (FTAs), domestic business conditions and various travel enablers.

The Indian hospitality sector was ramping up nicely before 2008, but decelerated in the period between 2008-15 due to a weak global economy, poor infrastructure and policy paralysis at the Central Government level – all of which resulted in a fall in FTAs.

Indian Hospitality Sector

Today, the Indian hospitality sector has not just recovered from the slump but is once again beginning to register robust growth which seems very sustainable over the coming years. The hospitality sector is primarily driven by business and leisure travellers from within and outside India.

According to recent reports, India witnessed FTAs of 10.2 million in 2017 – representing an almost two-fold rise in the last seven years – and is expected to reach 20 million by 2020 (another two-fold rise from current arrivals). Rising FTAs is a reliable bellwether of future growth for the Indian hospitality sector.

Business Travel Growth

In recent times, there has been a significant rise in international business travellers due to the Central Government’s pro-business initiatives, improvement in India’s ease of doing business rankings, implementation of GST to unravel and ease the previously complex tax regime, and proliferating urban development.

As a result, international companies are looking to expand their Indian operations, resulting in a huge influx of foreign business travellers.

Simultaneously, rising business opportunities across the country, coupled with the Government’s push for entrepreneurial ventures and start-ups, is positively influencing domestic business travel. The combined effect of increased international and domestic business travel is ramping up the requirement of business-centric hotels.

According to reports by WTTC and TravelPort, India ranked 11th globally in business travel spending and registered a growth rate of 16.2% during 2011-16.

The same report also confirms that business tourism spending in India reached US$ 8.2 billion in 2008 – the highest since 1995. However, this figure fell to US$ 5.2 billion in 2011 due to an overall slowdown in the country, and the hospitality sector took a big hit due to this decline.

Nonetheless, business spending once again grew to US$ 11.6 billion in 2017, depicting a two-fold jump from 2011 and indicating a fairly rapid recovery from the downtrend. We are now looking at a potential growth figure of US$24.4 billion by 2028.

Domestic Travel Growth

According to the Ministry of Tourism, domestic tourism has outpaced FTAs and rose from ~14,300 lakh in 2015 to ~16,100 lakh in 2016, registering a 12.6% growth as compared to 9.7% growth in FTA during the same period.

This growth can be attributed to rising disposable income, increased availability of serviced apartments and hotels, and the aggressive price wars among low-cost airline carriers.

This increase has also triggered budget and business class hotels in the metros and tier I cities. Domestic tourism spending has witnessed a linear rise.

In 2005, it accounted for US$ 82.6 billion, reached US$ 186 billion in 2017 and is expected to rise to touch US$ 405 billion by 2028.

Proactive Policy Support

To support tourism and its allied industries, the Government of India has launched several initiatives to promote them.

Some of the most significant initiatives are a 5-year tax holiday for star hotels around UNESCO world heritage sites, an extension of e-visa for 161 nations, and setting up of a dedicated hospitality development and promotion board for faster clearance/approvals of projects.

Moreover, 100% FDI is now allowed in tourism and hospitality under the automatic route. The hotels and tourism industry received cumulative FDI inflows of US$ 10.9 billion from April 2000 to December 2017.

Due to the huge potential of the Indian hospitality sector, international hospitality brands are targeting India to set up their hotels – for example, Carlson Group is aiming to increase the number of its hotels in the country to 170 by 2020.

Some notable private equity deals in the Indian hospitality sector in recent times:

  • In Q1 2018, Lemon Tree Hotels raised around US$ 48 million from anchor investors including SBI Magnum Balanced Fund, DB International Asia, HDFC Small Cap Fund, Aberdeen Asian Smaller Companies Investment Trust Plc, BNP Paribas Arbitrage and Alpine Global Premier Properties Fund.
  • In 2016, Goldman Sachs invested US$ 66 million in PE-controlled hospitality firm SAMHI Hotels Pvt. Ltd. SAMHI group which owns 16 operational hotels has also previously raised US$ 75 million through Equity International.
  • In Q4 2014, Goldman Sachs invested US$ 40 million through an equity deal in Vatika Hotels, the hospitality arm of Gurgaon-based developer Vatika Group. Vatika Group majorly focuses on facilities management, hotels & resorts, wellness & diagnostic centre and restaurants.


The Indian hospitality industry is a key constituent of the travel and tourism sector, which hinges on business and leisure travellers.

The travel and tourism sector’s contribution to India’s GDP, as well as the employment and foreign exchange it generates, are growing rapidly – as are other industries associated with it.

Internal travel and tourism consumption, which indicate the revenue generated within a nation by the sectors dealing directly with it, is forecast to touch US$ 456.7 billion by 2028 from US$ 213.3 billion in 2017).

This is lead to the growth of the directly-correlated hospitality sector as well. We are therefore already looking way past an initial recovery and are witnessing full-fledged growth in this industry.

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Distressed Real Estate – Invest or Avoid?

Shobhit Agarwal, MD & CEO – ANAROCK Capital

The aftershocks of multiple disruptive policy reforms and structural changes continue to ripple through the Indian real estate sector. While its visible transformation from unorganized to organized and opacity to transparency are indubitably positive, we cannot help but count the fatalities of this process.

Many real estate developers are finding it extremely difficult, if not impossible, to realign their businesses to the new norms. It’s not just a question of compliance, but also the fact that the new real estate development norms call for massive capital infusions.

The practice of raising interest-free monies via pre-launches now more or less a thing of the past, interest rates are hardening and the banking sector is not especially well-disposed towards lending to developers.

Simultaneously, investors who had depended on heavy cash components for their resale properties have been left in dire straits by demonetization and the concerted drive towards financial transparency.

Many developers need to sell their hung-over inventory in a hurry – either to raise funds for new projects or so that they can cash out and leave the business. Likewise, many investors or other property owners are also desperate to exit their holdings.

And as is usually the case, one man’s loss is inevitably another’s potential gain. The current state of the market certainly presents a window of opportunity for smart property buyers who can make the most of it.

Today, there are plenty of distressed properties available on the Indian real estate market. The available opportunities include retail assets, hotels, individual residential units and even entire housing projects. With proper due diligence and the appropriate capitalization, one can actually strike a gold mine.

However, one still needs to know what one is doing, and also follow some very necessary precautions before entering into a distressed property deal.

Is this the right time to buy distressed properties? 

With rising population in urban areas (more than 10 million people migrate to Indian cities and towns every year, and India’s urban population likely to surpass 800 million by 2050), there is a significant inherent demand for homes, offices, malls and other real estate asset classes.

In the current market conditions, many distressed assets are available at attractive valuations and it may not be a bad idea to seal a deal. However, one should not do this without a clear plan of action on how to utilize or monetize the acquired asset.

Aspects to investigate before acquiring a distressed property:

  • Reasons for the distress sale 

It is extremely important to identify the reason for why a property has become distressed, to assess if they involve policy changes (which may affect the new owner as well), financial troubles or wrong intent. The latter is the most difficult to identify and tackle, and so must be investigated with utmost care.

  • Existing debt

A distressed property buyer must do a thorough check on the existing debt which the new buyer will assume. In addition to the overall quantum, one must segregate such debt into short-term and long-term, and also understand if the debt is backed by any security or otherwise.

  • Physical condition

However attractive the valuation may appear, the physical condition of the asset to be purchased plays a key role in its inherent value to the new owner. Regardless of whether the buyer plans to refurbish and release/sell and/or demolish and rebuild the property, this check is important to assess the cost implications.

  • Law adherence

A prospective buyer of a distressed property must ensure that the asset is developed as per the stipulated regulations, including FSI permissions, statutory approvals, fire safety norms, and many more. If there is even a faint hint of a violation, the buyer must understand the risks and have a plan towards mitigating them.

  • Litigation check

The buyer should check for litigations that embrace the distressed asset. It should be commercially viable to own the property despite the existing litigations, and the buyer should have the knowledge, means and a plan to overcome such issues.

  • Title clarity

A clean title is a must for the hassle-free future transactions or development of the purchased asset.

  • Lease contracts

If a buyer is acquiring a pre-leased asset, it is imperative to check the lease contracts and their expiry dates so that they can be factored into future financial projections.


The momentary pause and panic in the real estate sector of a country whose GDP likely to reach $5 trillion by 2025 can certainly be viewed as an opportunity by large global investors who are looking to enter into or expand in India.

However, such players are not gamblers and will always ensure that they have the benefit of an experienced India-based consultancy to identify opportunities as well as their accompanying risks and required mitigation plans.

Individual investors, on the other hand, bear the onus of due diligence while acquiring distressed assets.

It should be clear that a well-meditated play in distressed property can reap rich benefits, while an inadequately researched acquisition can result in a severe financial setback and even legal complications.

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