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Amidst market challenges and regulatory hurdles, Indian real estate developers are delaying or abandoning plans for Real Estate Investment Trusts (REITs) despite existing ones showing modest returns. Notable developers like Bagmane Developers, DLF, and Prestige Estates Projects have halted REIT plans, citing unfavorable market conditions.
Market estimates suggest 90-95 million sq ft of REIT-ready assets, but factors such as high interest rates, sluggish office uptake due to a global slowdown, and regulatory norms act as deterrents. Existing office REITs yielded 5.9% to 8.9% last year, with expectations of limited improvement over the next two to three years, according to Nuvama Research.
While REITs have been present for five years, they remain largely subscribed to by institutional investors. Distribution yields are one measure, but capital appreciation is also considered, and future growth potential, especially with 20% of portfolios being under construction, adds to net operating income. Despite this, until last year, REITs underperformed, leading to losses for some investors who entered at high unit prices.
Vacancy rates in the office sector are around 18%, and an anticipated high supply of office space may keep these rates stable, impacting rental prices. REIT distributions are directly tied to the rents extracted from tenants. Regulatory changes, including sponsors' perpetual involvement in REITs, pose additional obstacles. Therefore, developers are trending with caution and waiting for the right time to launch their REITs.
The delay in plans by multiple developers signals the impact of market dynamics and regulatory complexities on the real estate sector's REIT aspirations. The market continues to evolve, and developers remain watchful for favorable conditions before proceeding with REIT offerings.
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