Securitised Real Estate in India: Valuation gaps, yield realities, and the structural evolution of REITs

Market Evolution and Context

Commercial real estate investment trusts (REITs) in India have transitioned from initial conceptual uncertainty following the 2014 Securities and Exchange Board of India (SEBI) regulations into a mature, established asset class.

Valued at USD 17.7 billion, India stands as Asia's fourth-largest REIT market, surpassing Hong Kong.

The scale of the market is substantial, with total rated commercial assets under management expanding to between INR 2,00,000 crore and INR 3,00,000 crore, alongside infrastructure investment trusts (InvITs) growing to roughly INR 8,00,000 crore.

Domestic mutual fund holdings in listed REITs have surged to surpass INR 31,000 crore, demonstrating broad institutional acceptance and liquidity.

The securitised ecosystem broadened further following the formal notification of Chapter VI-B of the SEBI REIT Regulations in March 2024, which introduced Small and Medium REITs (SM-REITs). This framework created a regulated bridge between institutional-grade commercial property and retail fractional ownership platforms.

Consequently, a two-track market has emerged, characterised by large, liquid, institutional total-return REITs trading at persistent discounts to Net Asset Value (NAV), contrasted against higher-yielding, single-asset, and largely illiquid SM-REIT schemes.

The Regulatory Divide

Standard REITs and SM-REITs operate under distinct regulatory parameters designed for different investor bases and asset profiles.

Standard listed REITs require a minimum portfolio value of INR 500 crore with no upper cap, allowing up to 20% of gross asset value to be allocated to under-construction assets or debt instruments.

Conversely, SM-REITs are tightly regulated, pooling capital between INR 50 crore and INR 500 crore per scheme, with a strict mandate that at least 95% of scheme assets remain in fully completed, revenue-generating commercial real estate.

Entry barriers also differ significantly. Standard REITs offer high liquidity with minimum trading lots of a single unit costing between INR 300 and INR 500, whereas SM-REITs impose a mandatory INR 10,00,000 minimum ticket size at issuance and secondary trading.

While both vehicles mandate a minimum of 200 unitholders, SM-REITs face stricter governance constraints, including a total prohibition on related-party asset acquisitions.

Subsequent regulatory updates in 2025 and 2026 introduced accelerated five-working-day distribution timelines, space-wise denotifications in Special Economic Zones (SEZs), and Reserve Bank of India (RBI) rules requiring financial institutions to mark quoted REIT holdings strictly to market prices.

Understanding the Valuation Gap

A defining feature of the Indian REIT market is the persistent disconnect between independently appraised asset values and public market trading prices.

Five out of six standard office REITs trade at discounts ranging between 1% and 15% below their reported NAV per unit, whereas the retail-focused Nexus Select Trust commands a sustained valuation premium.

This valuation dichotomy reflects fundamental methodological differences. Independent valuers registered with the Insolvency and Bankruptcy Board of India (IBBI) utilise discounted cash flow models incorporating exit capitalisation rates between 7.50% and 8.25%, with weighted average cost of capital inputs of 11.50% to 11.75%.

Public capital markets, operating in a high interest rate environment, apply higher hurdle rates and implied cap rates between 8.50% and 9.25%. Public markets also apply valuation haircuts for non-recoverable capital expenditures, fit-out amortisation allowances, tenant replacement concessions, and prospective leasing downtime.

The resulting pricing gap highlights an underlying asset quality bifurcation between integrated, master-managed Grade-A institutional business parks offering dual-fuel power redundancy and transit links, and standalone strata-titled office floors that lack master infrastructure control.

Yield Realities and Taxation

Standard Indian office REITs face an inverted yield spread relative to risk-free benchmark debt. With the 10-year Indian Government Security (G-Sec) yield holding at 7.21%, large listed office REITs trade at distribution yields of 5.50% to 6.50%, creating an inverted spread of -70 to -170 basis points.

As a result, institutional underwriting relies on total-return compounding rather than static yields, driven by triennial contractual rent escalations of 10% to 15%, mark-to-market re-leasing gains, and capital appreciation targeting a 12% to 14% internal rate of return.

Conversely, although SM-REITs offer headline distribution yields between 8.10% and 9.00%, generating a positive spread of +90 to +180 basis points over the G-Sec benchmark, this yield premium compensates for single-asset concentration risks, tenant lock-in expiry cliffs, and intermediary counterparty exposures to flex-space operators.

Capital structure and tax efficiency further influence net investor returns. While standard REITs maintain conservative net debt levels between 28% and 32% with borrowing costs around 7.25% to 8.05%, SM-REITs utilise low-leverage vehicles that pass cash flows primarily as tax-exempt dividends, resulting in post-tax yields of 6.8% to 7.2% compared to 4.8% to 5.4% for standard REIT payouts taxed partly as interest.

Operational Bottlenecks in SM-REITs

Despite offering a regulated path for fractional property ownership, the SM-REIT framework suffers from significant operational friction. High compliance and listing costs of INR 1 crore to INR 2 crore per listing erode net yields on smaller assets, sometimes driving net returns below fixed deposit rates.

The maximum asset cap of INR 500 crore per scheme forces sponsors into repetitive structural setups rather than scaling single unified vehicles, while a 10% institutional investment cap restricts institutional commitments to INR 50 crore, deterring major portfolio allocators.

Furthermore, the mandatory INR 10 lakh minimum lot size creates a severe liquidity impasse, restricting secondary trading on the BSE and NSE to negligible volumes.

Holding isolated floors within strata-titled buildings also deprives SM-REIT managers of active net operating income growth opportunities and estate control enjoyed by mainboard REITs.

Legal and technical hurdles in migrating legacy fractional ownership platforms have exacerbated market friction, demonstrated by high-profile setbacks such as Strata surrendering its SM-REIT license following promoter litigation and tenant disputes.

Commercial Real Estate Fundamentals

Underpinning both securitised vehicles is the fundamental strength of Indian commercial property, driven overwhelmingly by multinational corporate expansion.

Global Capability Centres (GCCs) remain the core driver of commercial absorption, generating approximately 60% of annual net office leasing across key hubs including Bengaluru, Hyderabad, Pune, and Gurugram.

This demand accounts for 30 million to 40 million square feet of annual space take-up, concentrated in institutionally managed Grade-A campuses.

Regulatory adjustments permitting space-wise denotifications in SEZs have enabled REIT managers to convert vacant SEZ stock into non-SEZ office space, boosting overall occupancy rates.

For property developers and private equity sponsors, listed REITs have established themselves as the primary capital-recycling tool to exit mature, yield-generating Grade-A assets.

Substantial scope exists to aggregate regional, standalone mid-sized Grade-A commercial portfolios of 4 million to 5 million square feet into consolidated REIT vehicles to unlock institutional scale and valuation premiums.

Capital Flows and Future Outlook

The investor landscape for Indian securitised real estate reflects growing domestic institutional depth, with capital allocation expanding beyond foreign portfolio investors to include domestic mutual funds, insurance companies, and family offices seeking liquid, inflation-hedged yields.

Dedicated passive index products, such as Nifty REITs & Realty Index funds, systematically capture retail systematic investment plan inflows, providing trading liquidity and stabilising unit pricing.

Looking forward, potential monetary easing by the RBI could compress sovereign yields from 7.21% towards historical averages near 6.50%, driving capital appreciation and narrowing the historical NAV discount across standard REITs.

For SM-REITs, unlocking a pipeline of over 260 million square feet of strata-owned Grade-A space requires targeted regulatory recalibration.

Industry consensus points toward reducing minimum trading lot sizes from INR 10 lakh to INR 1 lakh or INR 2.5 lakh to foster secondary market liquidity, along with raising scheme asset caps to INR 1,500 crore to achieve viable institutional scale.

Ultimately, as domestic capital continues to deepen and regulatory frameworks refine, the alignment of independent valuation methodologies and trading liquidity will define the next phase of maturity for India's securitised property landscape.

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This analysis consolidates discussion insights among industry leaders at GRI Funding Opportunities India 2026 with recent market research.

Additional sources:

• Securities and Exchange Board of India (SEBI)
• Reserve Bank of India (RBI)
• Embassy Office Parks REIT
• Brookfield India Real Estate Trust
• Property Share Investment Trust (PSIT)
• ET Money
• BSE and NSE India
• Acuity Law and Legal500