Real Estate Investment Trust - REITs
What is a REIT?
REIT or Real Estate Investment Trust refers to an entity created with the sole purpose of channeling investible funds into operating, owning, or financing income-producing real estate. REITs enable an investor to invest in a portfolio of income-generating real estate assets, by purchasing units of the REIT, similar to units of a mutual fund.
Real Estate Investment Trusts in India historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation. Their comparatively low correlation with other asset classes makes them an excellent portfolio diversifier that can help reduce overall portfolio risk increases returns.
Global inflationary pressures present a suitable time for Real Estate Investment Trusts to outperform bonds and stocks. Increased prices lead to an increase in real estate rents as leases are directly tied to inflation. The current economic state is prone to rise in inflation. This is advantageous for REITs as high inflation rates also reflect higher rental incomes. REITs can function as a natural hedge against the current inflationary environment.
The goal of any investment is to generate wealth for investors and/or provide regular income. REITs provide both these benefits to unitholders. Investors can receive periodic dividends and/or interest pay-outs that provide regular income and at the same time, the sale of REIT units on stock markets can provide Capital Gains to the investor.
REIT’s Outlook
The real estate segment has also witnessed institutional investor interest over the last decade especially in the commercial office and warehousing space. This has led to the institutionalization of this segment with large specialized domestic corporates such as developers, multinational companies as tenants, and global & sovereign funds as investors being the key stakeholders. This has provided a conducive ecosystem for the development of Real Estate Investment Trusts in India.
The development has set a foresight of transparency, depth, and liquidity for the commercial real estate marketplace in India. The increased competition and transparency that ought to arise with a dynamic REIT market, will lead to better maintenance and operation of the assets. It is expected that a more developed and professional REIT sector, will significantly contribute to broadening the base of real estate investors, particularly by attracting institutional and retail investors.
The sentiment towards office space will remain positive in India, Therefore, investors are likely to continue to consider Real Estate Investment Trusts as a stable income generator even in the long run, given that India’s office sector has traditionally witnessed high occupancies backed by long pre-existing leases and lease extensions from corporates.
Ultimately, I believe that a healthy balance sheet, a strong management team, and a well-planned portfolio would enable future REITs to tide over near-term uncertainties and ensure long-term success.
Direct Investing in Real Estate vs Investing in REIT’s
Direct real-estate investing means buying a specific property, residential or commercial, and receiving subsequent income from it. The income could come from property rent, appreciation or profits generated from business activities conducted at the property. With direct investing, you have greater control and decision-making power.
With REITs, on the other hand, investors do not need to buy any physical property. A REIT is a corporation that acts like a mutual fund for real estate investing. It owns or operates income-generating real estate or real-estate-related assets and pools the capital of multiple investors. Basically, investors have the opportunity to receive income from real estate without having to own or manage the property.
Real Estate Investment Trusts in India offer higher liquidity and easier exists than what you can expect with direct investments. They offer decent returns, comparative safety, and steady income and offer the investor an opportunity to diversify their portfolio. On the other hand, they are newer in the market and trading on the stock exchange hence there is a risk of value fluctuations and market dynamics.
Commercial properties will give you higher returns with appreciation in value and more control, although you will have to contend with direct responsibilities and liabilities. You have to plan before investing directly in real estate as it requires a huge cash outlay. You will also get no tax benefits on your purchase. Direct investing also requires hours of research and multiple property visits before finalizing one. There is also a lot of legal work and paperwork involved.
Bottom Line:
Real Estate Investment Trusts in India make sense for investors who don't want to operate and manage real estate, as well as for those who don't have the money or can't get the financing to buy real estate. REITs are also a good way for beginner real estate investors to gain some experience with the industry.
How can one invest in REITs
How to Invest in REITs in India is indeed a million-dollar question. Some of the best REITs in India are listed and traded on the stock market, just like equity shares are. Therefore, a Demat account is mandatory for investing in listed REITs in India. SEBI requires listed REITs in India to have a three-tier structure like mutual funds. The sponsor sets up the REIT, the manager runs the portfolio and the trustee is supposed to watch over both.
Earlier, there was a minimum requirement of INR 50,000 for an investor to invest in units of REITs in India; however, recently, vide notification issued by SEBI on July 30, 2021, the same has been dispensed away with, for investment directly via stock exchanges. The minimum investment criteria of INR 10,000-15,000, which is reduced from INR 50,000.
Another shift in policy is the lot size of REITs traded, which was a lot size of 100 units. By virtue of the same SEBI notification, the minimum lot size has been reduced from 100 units to 1 unit.
At present, there are 3 REITs that allow investors to invest in India. These include:
Embassy Business Park REIT
Mindspace Business Parks REIT
Brookfield India REIT
The price of REIT units on stock markets changes depending on both the demand for units as well as the performance of the REIT.
The demand for office space is estimated to be at 11.67 million sq. ft over the next two years based on hiring by the top-five IT companies in the last 18 months and incremental demand for office space. Hence this is a great time to invest in Real Estate Investment Trusts in India.
Here is how one can diversify their portfolio -
Example:
Rishabh is 33 years old and is currently working as Head of Sales at a MNC company with an annual salary of XXX. He has INR 25Lakhs of savings to invest and consults his fund manager, Aman as to what is the best way, he can diversify his portfolio.
Aman suggests that he invest his 25Lakhs in the following way:
With the GDP forecasts indicating 8-9% growth, the commercial real estate sector will bounce back strongly. Real Estate Investment Trusts are then likely to have an accelerated entry into the market. This will lead to a win-win situation for all. The occupiers will get better quality and managed buildings and investors will get a choice of REITs across asset classes. There will also be much greater transparency in the market.
REITs are a great way to diversify a portfolio, but does diversification into global realty make sense?
Indian investors can now gain a lot from global REITs in terms of diversification in geography and currency. It adds an attractive and new dimension to an investor’s portfolio.
There are two reasons why Indian investors are looking at global realty - diversification and return potential, which according to them could be better than their Indian real estate portfolio. A key benefit of a global REIT is that unlike India, where listed REITs invest majorly in office spaces, investments in global realty funds offer diversified investment portfolios in residential, office, data centres, warehousing, retail, and hospitality, hence global REITs capture a larger number of themes for diversification, better than Real Estate Investment Trusts in India, which largely cover commercial or residential properties. Another advantage is that the underlying fund will be able to take advantage of the dollar appreciation.
A big challenge for an individual investing in global real estate funds would be the lack of information about geographies where the properties are situated. Before planning to invest in global realty funds, investors should also keep taxation in mind. Since all global realty schemes are FOFs, these funds are treated as debt funds. The gains for a holding period of fewer than three years are treated as short-term capital gains and are taxed at the slab rate. The gains over a holding period of more than three years are treated as long-term gains and are taxed at the rate of 20% post indexation.
Historically, global REITs have offered the highest long-term returns at 10.4 percent as compared with investment alternatives like private real estate (8.5 percent), stocks (7.5 percent), and bonds (4.5 percent).
All in all, the space of Real Estate Investment Trusts in India has been witnessing a gradual upward trajectory despite the aftermath of the pandemic. Beating the COVID blues, the REITs have ensured that they deliver value to the entire set of stakeholders, including investors, sponsors, trustees, and more.
This encouraging commercial REIT trend in India could well open space for its expansion into residential, retail, and hospitality segments in the years to come. Linked directly to the office space and commercial real estate sentiment, Real Estate Investment Trusts in India, with their modus operandi of monetizing rent-yielding office assets, promise a lot more in the months and the years to come.