According to an estimate by RREEF, the value of globally invested commercial real estate market is around $10 trillion in 2006. Invested market is the real estate market where space is owned by professional real estate investors, such as money managers, funds, private investment vehicles, listed companies, institutions etc. and this market is only two-thirds of investible market, which also includes investment-grade space that is owner-occupied.
US accounts for more than a third of investible stock (around $5.6 trillion) and around 85 per cent is already invested. Other major markets that have large proportion of invested real estate are Japan, UK, and Germany. About 90 per cent of around $1 trillion investible stock in the UK has already been invested. Emerging markets like India, China, Brazil and Mexico have very small proportion of market that are institutionally invested.
Despite phenomenal economic and property market growth in India, the size of investible commercial real estate stock is $100 billion because a large chunk of real estate stock is not investment grade. However, India is adding real estate stock at a fastest rate in the world. During current and next year, around 300 per cent of total stock is projected to be added despite an expected slowing down of the real estate cycle. According to RREEF, India would add 700 million sq ft of office space valued at $35 billion.
Who owns?Matured markets have a high share of institutionally owned real estate, with only 30-40 per cent of the real estate stock being owner-occupied. In India, most of the stock is owner-occupied. The forces of transformation are putting pressure for changes in the ownership structure of real estate. Companies in matured markets have outsourced their non-core activities to emerging markets. In emerging markets there is a trend towards consolidation to areas of competitive strengths and expansion.
Conditions such as pressure to divest real estate out of non-core activities, favourable property market indicators, and liquidity created by private equity are putting pressure for sale and leasebacks. A large part of sale and leaseback has been financed by private equity whose share in GDP in the UK was around 4 per cent during 2005-07. As a percentage of GDP, the share of private equity in India was around 0.1 per cent in 2005-07. There is huge volume of listed and private equity waiting to invest in India looking for investible assets.
There is at least around $6.5 to 7 billion in listed and private equity funds waiting to invest in real estate. One-third of this has been raised globally by listed funds and the remaining by domestic and global private equity funds. Sale and leasebacks are obvious candidates for investment by private equity in India, but their volumes are small by global terms.
Another source of funds is the public capital market. During 2006-07, many companies have successfully raised capital, clearly indicating capital market appetite for real estate assets.
Real Estate Investment Trust
Real estate investment trusts (or REITs) have established themselves as major investment vehicle for institutional and retail investors in matured markets. Although there are no REITs in India now but these would soon be an important vehicle for investment in real estate as SEBI is finalising guidelines for introduction of Real Estate Mutual Funds (REMFs) under Mutual Funds Act and would consider framing guidelines for REITs in near future.
According to a research by CBRE companies like UTI, Prudential ICICI, HDFC, Tata Asset Management, IL&FS, Milestone Capital etc. have expressed interest in launching such products. Some of these companies have already launched successful venture capital funds for investment in real estate which they consider listing as REMFs once SEBI finalises the guidelines. There are, however, certain operational and regulatory issues related to REMFs that need to be resolved.
The press release by SEBI approved REMFs to invest directly and indirectly (in the form of investment in securities of real estate companies or mortgage backed securities) into real estate but the operational requirement that NAVs of listed REMFs should be declared on a daily basis has made it difficult for REMFs to list. Declaring NAV on a daily basis is difficult in case of real estate mutual funds given the lack of transaction history and opaqueness of market. This requirement would be difficult to meet particularly for under-development projects.
Regulatory issues
There are regulatory issues like high property taxes and stamp duty which have led to non-registration of property transactions and transfer of properties through ‘Power of Attorney’ route. High stamp duty led to cash-based transactions routed through various shell companies. Involvement of multiple agencies in planning process for development projects leads to enormous costs substantial time overruns. These factors hamper transparency in the real estate sector in India. According to Moody’s and ICRA report, basic information like number and size of projects being executed by any given property group, end use of customer advances, nature of consolidated indebtedness and fund flow within the group and not easily available.
The scale of development activity and the maturing real estate market mean that Indian real estate market is set to grow strongly over the next five years. The capital market has strong appetite for real estate as has been demonstrated by recent real estate IPOs. SEBI’s guidelines regarding REMFs would pave a way for investment in real estate through listed real estate operating companies. However, establishing REITs would require changes in tax and legal framework besides increase in property industry’s transparency and disclosure levels. Would it all be worth? Answer in simply yes. We are in a global race and everybody here runs to win.
There is a trend towards cross border listings in the Asian REIT market. Singapore’s conducive REIT regulatory regime and relatively competitive tax system has favourably positioned Singapore to draw an increasing number of cross border REIT listing and establish Singapore as regional REIT hub. To be in the race India would need regulatory and legal reforms conducive to REITs as early as possible otherwise our own companies would start listing REITs on other markets. (By Piyush Tiwari – Indian Express)