After enabling three real estate investment trusts (Reits) to list in India over the past two years and creating a regime that has gained widespread domestic acceptance and global acclaim, Indian regulators should consider synchronizing Reit trading lots with those of listed companies to make them more liquid and accessible to a wider audience.
Since Blackstone and Embassy-sponsored Embassy Reit listed on 1 April 2019 as India’s first Reit, two others, the Raheja Group-backed Mindspace Business Parks Reit and more recently, Brookfield India Reit, have also debuted on the Indian stock exchanges. Together, these three Reits total approximately ₹55,094 crore of market capitalization and cover 86.0 million square feet of Grade A commercial office space in India.
In the past two years, approximately ₹19,000 crore of Reit equity has listed on the Indian stock exchanges. Retail participation in Indian Reits continues to increase, as evidenced by the robust retail participation in the Mindspace Business Parks Reit and Brookfield India Reit IPOs. Together, these three Reits have changed the landscape of commercial real estate in India.
The fractional ownership opportunities provided by Reits allow investors to reap the benefits of investing in commercial realty in a format that was previously unavailable to most. Investors can buy/sell Reit units on the exchanges, as opposed to investing directly in realty structures that were complex to create, opaque on fees, governance and management, and illiquid.
The ability of Reits to generate income from their underlying rent-yielding assets, along with the capital appreciation Reit unit prices can provide make them excellent instruments to capitalize on economic cycle upswings in times of growth, while consistently reaping the benefits of a mandatory distribution throughout economic cycles. In India, Sebi regulations mandate that a Reit must distribute 90% of its net distributable cash flows to unitholders, at least semi-annually.
Currently, Indian Reits trade in lot sizes of 200 units, whereas equities trade as low as one share as a trading lot. In established Reit markets like the US, Reit trading lots match those of their equity counterparts.
The ramifications of this lot size mismatch in Indian Reits are multifold. First, Reit unitholders must commit a greater amount of capital to begin trading, thereby eliminating a segment of the population that can and should be able to invest in the Reit safely.
Second, the higher trading lot hinders liquidity. Liquidity, or the ability of buyers and sellers to transact at readily available market clearing prices, is paramount for efficient price discovery. A lack of buyers and sellers increases volatility for unitholders and forces them to potentially transact at inefficient prices.
Third, this unique trading lot sizing also makes Reits ineligible for inclusion in benchmark NSE or BSE indices such as the Nifty 100 or Nifty Realty series of indices or the BSE Sensex series of indices. This ineligibility limits new pools of capital that can potentially invest in Reits via passive income funds or ETFs that track these benchmarks. Ironically, as a sign of their increasing global acceptance by international investors, Indian Reits are currently listed on benchmark global indices like FTSE Russell, FTSE EPRA NAREIT, GPR-APREA REIT Composite Index, MSCI India Domestic Small Cap and the S&P Property Indices.
Lastly, a lack of liquidity affects the long-term ability of Reits to efficiently utilize the capital markets to fund growth. Reits periodically access the equity and fixed-income capital markets to finance asset purchases. Global investors who participate in these offerings prefer investing in liquid structures that allow them to trade the securities efficiently in the secondary markets.
By bringing the trading lots in line with those of listed companies, regulators will take what is possibly the biggest step in ensuring Reits are as liquid for retail unitholders as are stocks, but with added layers of demonstrated safeguards to ensure their rights are protected. By ensuring Reits reach trading parity with listed equities, regulators will cement India’s Reit regime as a shining example of regulatory adaptability and capital markets evolution in one of the world’s most dynamic real estate markets.
Sigrid G. Zialcita is CEO, Asia Pacific Real Estate Association.