Commercial Real Estate Developer can raise Rs.1.5 lakh crore through the REIT method – CRISIL Report.

According to a report, almost 10 developers and operators of commercial real estate have the potential to raise Rs 1.5 lakh crore by monetising 184 million sq ft of space through the real estate investment trust (REIT) route.

The rating agency Crisil estimates that these assets account for around 30% of Grade A properties in the country’s major micro-markets with annual rentals of around Rs 17,000 crore. 

“Analysis reveals how Rs 1.5 lakh crore can be raised through the REIT by monetising 184 million sqft of space, assuming a capitalisation rate of 8.5% and a stake dilution of 75%, by the top 10 commercial real estate developers and operators throughout the country,” the report says.

The agency said that portfolios with annual rentals of over Rs 1,000 crore can bear higher transaction costs and adhere to regulations and are likely to use this approach more often, which translates into a minimum valuation of Rs 10,000 crore.

“While the residential sector investor interest is rapidly declining due to limited property price appreciation and inability to monetise assets, REITs can be a prospective option for investment, offering stable and on-going returns.

Similar to mutual funds are REITs that primarily invest in completed income-earning assets, and can be listed and traded on stock markets,” said Crisil.

Private equity firms are able to divest assets at the portfolio instead of individual assets through REITs. Their standard exit schedules of 7-10 years would be better compared to that.

The report states that vacancy levels are low to medium in all cities for Grade A offices. “This will benefit commercial lease rentals that we expect will rise by 5-10% annually for the next 2-3 years,” it said.

Moreover, Crisil noted that, with a high level of enforcement and strict regulatory requirements for REITs, developers with a smaller commercial portfolio will continue to use discount rental loans, available at rates of 9%.

“The REIT route is also not favoured by developers who choose to maintain the opportunity to capitalize rather than dilute their stakes,” the report said.