Sebi’s relaxation for Reits is good, but WFH may impact demand
Sebi has reduced the minimum application value for Reits from ₹50,000 to ₹10,000- 15,000, besides lowering the trading lot size to one unit for publicly-listed Reits.
Markets regulator, the Securities and Exchange Board of India (Sebi), has made real estate investment trusts (Reits) more accessible to a larger pool of investors. It has reduced the minimum application value for Reits from ₹50,000 to ₹10,000- 15,000, besides lowering the trading lot size to one unit for publicly-listed Reits.
Since the Reit market in India is at a nascent stage, the move is a step in the right direction, analysts said. Reits are still perceived as a complicated product and some investors have stayed away, despite the instrument giving better returns than some fixed-income products.
Now, a lower entry barrier would give investors a chance to explore this product and boost further awareness about it.
Experts said it will also pave the way for more Reit listings by commercial real estate developers. Sebi is yet to announce the implementation date for the new rules.
Reits invest in commercial real estate and earn rental income from their holdings, which is passed on to investors. They are also required to give 90% of their cash flows to investors at least once in six months. That apart, investors also benefit from capital appreciation of the underlying assets. So far, Embassy Office Parks, Mindspace Business Parks and Brookfield India are the three listed Reits in India. While the move is positive for commercial real estate companies, uncertainties for office leasing remains. Analysts warned of near-term pressure on office rentals and its adverse impact on the earnings of listed Reits. This could keep potential investors away from taking exposure in listed Reits despite Sebi’s relaxation, analysts said.
“Office sector vacancies have moved up by 400-500 basis points over the last six months on lower renewals at the point of expiry and higher supply,” analysts at JP Morgan India Pvt. Ltd said in a report on 29 June. One basis point is one-hundredth of a percentage point.
“This, in turn, is driven by lower visibility on return to office, which is reflected in rising vacancy levels across listed Reits and developer portfolios, and correspondingly stocks trading at a discount to net asset value,” the analysts added.
Reits issued by Embassy Parks are down around 23% from their pre-covid highs. Mindspace and Brookfield Reits are trading below their respective issue prices as well. Concerns are that even when the situation normalizes, firms could opt for a hybrid work structure including work from home (WFH), which could weigh on the office leasing outlook, especially for Grade A properties.
An analysis of listed Reits by ICICI Securities Ltd showed that the rental collections were strong at around 99% in FY21. However, their overall portfolios saw occupancy levels decline by 4-6% on a like-to-like basis for Embassy and Mindspace. This was due to the exits by tenants for scheduled expiries and early exits.
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