The Securities and Exchange Board of India announced last week that real estate investment trusts (Reits) and infrastructure investment trusts (InvITs) can now sell bonds as well as equity.
It also allowed Reits to invest in a single asset, which only InvITs could do previously, and to lend to their underlying special purpose vehicles. Reits will also be able to own 50% of an asset from the minimum 51% before, expanding the universe of Reit candidates.
The central bank followed suit this week, amending its rules to facilitate investments by Indian lenders into Reits and InvITs.
The regulators are right to do all they can to smooth the way for Reits and InvITs, given the asset classes have struggled to take off despite myriad efforts to spur issuance. No Reits have been listed in India, owing to both regulatory and structural problems in the country’s real estate market.
Only two InvITs have listed so far, and while they were well subscribed in primary, their performance in the aftermarket has been dismal. That disappointment is in stark contrast to the bullishness on display among ECM bankers in Mumbai this time last year, when many proclaimed 2017 to be the year of the Reit and InvIT.
But the truth is more sobering. No matter what the regulators try, trust products have yet to gain wide acceptance among Indian investors — and it will be a long time before they do.
It is true that India’s realty sector holds no shortage of potential for Reits, with some even betting the market could outpace Singapore — Asia’s Reit champion — 10 years down the line, given the breadth of Reit-able stock in one of the world’s most populous countries.
But potential does not always translate into reality, and that is where Reits and InvITs stand in the larger scheme of things.
Following the share price slide of IRB InvIT Fund and India Grid Trust, conglomerate Larsen & Toubro has resorted to trialing a new bookbuilding format for its proposed Rp40bn ($625m) InvIT, skipping high net worth funds in favour of a direct placement to institutional investors.
The cheapening of a yield security should theoretically make it more attractive from a yield standpoint, but despite the double-digit yields on offer from the two InvITs, investor interest has remained tepid.
And even with the excitement surrounding the first Indian Reit, which is expected to come from the joint venture of the US’s Blackstone Group and India’s Embassy Property Developments, a number of structural hurdles remain.
For one, cap rates for private real estate transactions are in the 8% area, so for asset owners to gain a meaningful arbitrage for listing a Reit, as well as to offer a decent pick-up in yields to the mid-single digit risk-free rate to investors, market participants see reasonable dividend yields at around 6% to 7%.
While Reits are technically a total return play and have an advantage over InvITs in that they offer potential for capital gains over the long term from the appreciating price of property, a 7% yield looks like a tough sell.
These returns also need to be seen in the context of the Sensex’s near 20% gain year-to-date, as well as a booming primary market that has powered the BSE IPO index to a 42% surge this year.
All this of course does not mean Reits and InvITs are failed products, but it does mean their time has not yet come.
The central premise of the asset class — to give a fillip to infrastructure financing and property development — remains an important one, and these are products every market needs as part of a healthy capital market.
But for now, the country’s regulators can only do so much to boost the market.