Introduction
In India, real estate or property is viewed as an investment product as well as for consumption. For an individual, home equity is typically regarded as a significant and valuable asset, which is why a good deal of thought and analysis goes into buying property.
To further propagate investment in real estate, one emerging concept has been the advent of 'Real Estate Investment Trust' (REIT). While still in its incipient stage in India, REIT investing has been a popular and widely used investment route around the world for decades.
Aim and objectives of REITs
How do real estate investment trusts work? Understanding how do reits work is knowing how mutual funds work. Investing in REIT can enable you to invest in a pool of real estate properties without having to own the physical property itself. REITs invest in revenue yielding assets, primarily large commercial spaces and establishments, and work as a pass-through entity for investors looking to purchase into this specific portfolio of instruments.
Currently, to know how REITs work in India, it can help to look at the latest IPO listings within the commercial sector. Also, a growing interest is now seen for retail spaces, shopping malls, large residential spaces and hotels. This sector has yet to gain a toehold in the country, but because rental incomes on commercial assets are far higher than the returns on other asset classes, it is likely to get a boost in the coming months.
The principal aim of investing in REITs is to generate revenue distribution and the long-term appreciation of assets. In this structure, assets are professionally managed and the income received from them, typically in the form of rent, is effectively distributed among REIT unitholders. This income is distributed after accounting for charges, including the management for real estate investment trust work and property management fees.
Investing in REITs
The investment process is easy and straightforward. Unitholders invest through initial public offerings, for the REIT to buy into a pool of real estate assets. These properties are then leased to interested tenants. The flow of income generated through rents is, in turn, directed back towards investors through dividends, thus forming a mutually beneficial situation for both parties.
As an investor, you can view REITs as an additional mode of investment. It can provide you with a regular stream of income with the likelihood of asset appreciation over the course of its tenure.
Here are some of the essential benefits of investing in REITs.
- Tax exemptions: Based on Income Tax laws, you stand to benefit from a distribution of at least 90% of taxable income every year as part of joint investors or unitholders, while enjoying tax transparency treatment. As an individual investor, the distribution you receive also enjoys tax exemption treatment.
- Clarity and flexibility: If you wish to receive information on REIT prices or trading REITs, you can access them online through trading hours.
- Diversification: REITs can be a part of a percentile of a well-diversified portfolio among stocks, mutual funds, commodities, precious metals and others.
- Ease of use: One of the most primary advantages of investing in REITs is the ease through which you can invest. Average investors can easily access relatively expensive properties, specifically commercial real estates, in the form of mutual funds.
The current state of REITs in India
India's first real estate investment trust that listed on the stock exchange in 2019 - Embassy Office Parks - was a resounding success. Viewing this, several developers are now planning to join the fray. For instance, Mindspace Business Parks REIT, backed by K. Raheja Corp. and private equity investor Blackstone, recently sought SEBI's permission to launch an IPO. Other interested developers planning to list their REITs include the Prestige Group and RMZ Corp. Besides, Godrej Properties and Pune-based Panchshil Realty have also displayed interest.
What REIT investments mean for you
As an investor, you can take advantage of high-quality rent yielding properties by investing in REITs, which would otherwise be high-priced. REITs units, when listed on the stock exchange, can help you avoid liquidity issues that real estate investments generally go through. This further means that as an investor, you can opt to bear only a fraction of the overall cost by purchasing only a few units.
Besides, the entry cost is minimal compared to purchasing an actual property. A critical aspect that works in favour of REITs is safety and security. SEBI mandates that 80% of the real estate portfolio owned by a REIT must consist of completed and revenue-generating real estate properties. The remaining 20% of the asset value can be invested in under-construction assets.
Revenue from REITs
You can receive income from REITs under two heads.
- Rental income: This is typically distributed as dividends. Initially, it could yield 6 -8% of the yearly investment, and gradually increase as rents and occupancies grow. SEBI stipulates that 90% of the rental income must be paid out to investors as dividends.
- Income from interest earned: In REITs, real estate assets are not directly owned by the trust. Rather, through a Special Purpose Vehicle (SPV) in which the trust owns a share. The revenue that the SPV repays is distributed to unitholders as interest income. With the rise in rents, leasing of vacant space, adding new properties to the REIT's portfolio through recent developments, leasing under constructed projects, and more, investors can benefit from increasing returns.
Value-added services to the REITs portfolio could result in better rent fulfilment. Besides, a decrease in interest rates in the economy and an increase in the capital value of primary properties could benefit investors with enhanced returns over 3-5 years.
As an investor, you could also gain when selling the units. For instance, the REITs issue price for Embassy Office Parks was ₹300. On February 3, 2020, its REIT closed at ₹402.23, over 34% of its issue price in just ten months.
Factors to consider when evaluating REIT investments
It can help to assess the REIT before investing, based on the sponsor's and brand's track record. Evaluating the quality of construction can be challenging for retail investors, and hence, it is imperative to consider the location of the properties, it's rental potential and the tenants. These details and more are accessible and available in the offer document that must be scrutinised prudently before investing.
It is also essential to look into the occupancy of the assets within the REIT and the average time of the lease. Blue-chip companies and multinational corporations are typically property occupants that you may want to consider.
Given the slew of IPOs that could be launched in the coming years, it can also help to look into institutional investors as well. Considering other factors such as economic downturn, an oversupply of commercial space, delay in completion of under-construction properties and similar factors can help in making the right decision.
Conclusion
REITs were introduced in India in 2014, but over the past few years, stringent regulatory changes have made this structure appealing to developers while also shielding the interests of investors. Consider REIT as revenue-generating assets that can offer you better yields than fixed deposits in the long run.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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