Developers put REITs on hold on uncertain market conditions

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Several developers with commercial assets in their portfolio, who were planning to float real estate investment trusts and list their units, have put them on hold as they feel that the current market conditions are not conducive for a REIT offering.

Bengaluru-based Bagmane Developers was working on filing draft papers for a REIT, but sources indicated that it has been postponed for now and it is looking at a pre-IPO placement. DLF, which was earlier talking about a REIT for its rental arm DLF Cyber City Developers, has shelved its plans altogether. Prestige Estates Projects has also put its REIT plans on the backburner and so have some other Kolkata-based developers.

A spokesman for DLF said there were no plans for a REIT now. There was no response from Prestige Estates to an email seeking comment while Bagmane could not be contacted.

According to property consultants and market estimates around 90 to 95 million square feet of REIT-ready assets were there in the market in early and middle of 2023. However, with the high interest rates attracting good tenants, the sluggishness in office take up due to global slowdown and regulatory norms are some of the major factors that are acting as deterrents.

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Though REITs have been around for five years now, they are still nascent products, largely subscribed to by institutional investors. A quick look at the performance of the existing three office REITs show that distribution yields last year ranged between 5.9 per cent and 8.9 per cent. Compare this with the seven-plus per cent yield of the benchmark ten-year government paper.

According to Nuvama Research, the yields are not expected to improve over the next two to three years.

Distribution yields are not the only way to gauge the returns of REITs, as they also offer capital appreciation, said KunalMoktan, Co-Founder and CEO of PropertyShare, a real-estate investment platform. However, till last year all of them were underperformers and had given very little appreciation for unitholders. Those who entered when the unit prices were high after listing, would be sitting on losses.

Moktan pointed out that the future growth potential of the REITs should be factored in since around 20 per cent of the portfolio is under construction assets that will add to the net operating income when they are fully developed. “As the rents go up and the value of the land appreciates that translates into the stock price and that’s why institutional investors are buying,” he said. He added that rents have mirrored the inflation rate over the past 15 years and would likely grow at a stable five to six  per cent over the next ten years.

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Vacancy rates in office sector are at around 18 per cent and the high supply of office space that is expected to come in will likely keep them at those levels putting a downward pressure on rentals. REITs distributions are directly related to the rents that they are able to extract from tenants.

“Everyone is waiting for the right time,” said Amit Gupta, partner at law firm Saraf and Partners. He said that developers were not getting good rents and getting a property REIT-ready was taking time as tenants were looking for ESG-compliant, platinum graded spaces.

Regulatory changes such as sponsors continuing for perpetuity in the REITs are also obstacles, he said.

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