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  • Writer's pictureTeam ArthaPurna

Real Estate Investment Trusts

Updated: Oct 25, 2022

In India, real estate or property is seen as a product for both consumption and investment. Home equity is often seen as a large and important asset for an individual, which is why purchasing real estate requires careful consideration and analysis.

The creation of "Real Estate Investment Trusts'' is one new idea that has emerged to promote real estate investment further (REIT). While REIT investing is still in its early stages in India, it has long been a well-liked and often employed investment strategy globally.

Without having to own the actual property, a REIT can allow you to participate in a pool of real estate assets. For investors wishing to buy into this particular portfolio of properties, REITs act as a pass-through organisation by investing in revenue-producing assets, primarily sizable commercial spaces and businesses.

It makes investments in real estate that can produce rental income, such as office buildings, warehouses, shopping centers, etc. However, office assets are the primary focus of Indian REITs. Investors might get a dividend as a regular source of income from REITs. The company's rental income is used to pay this dividend.

Similar to mutual funds, REITs have a sponsor, a fund management company, and a trustee. With its cash, the sponsor supports the REIT's marketing efforts, and the fund manager chooses and acquires the properties for the portfolio. The trustee makes sure that the funds are used and handled with the best interests of the investors in mind. Investors benefit from REITs because they can diversify their portfolio of investments and get consistent dividend payments.

How to Invest in REITs?

REITs are introduced through an Initial Public Offering (IPO) and a subsequent public offering, just like equity equities (FPOs). Therefore, having a Demat Account is required. REITs trade on the stock exchange when the original offer is concluded, and the allocation is complete.

The minimum investment for a REIT investment was INR 50,000 prior to July 30th, 2021. The minimum investment amount is now between INR 10,000 and INR 15,000 following SEBI's notice on July 30th, 2021. his was done to stimulate more listings and boost liquidity in the REIT market.

In the same SEBI regulation, the minimum lot size for REITs was also decreased from 100 units to 1 unit. Because the minimum investment is low, both small and large investors can participate in India's real estate industry.

Types of REIT: -

According to the type of business they are engaged in and whether they are private or public organisations, there are six different types of REITs in India. Following is the list of different types of REITs:

  • Equity REITs: These are the ones that own all the assets that generate income. Rents are how it makes money. The most common kind of REIT is this one. All investors will receive a share of the income earned.

  • Mortgage REITs: Also known as mREITs, mortgage REITs provide financing to companies involved in the real estate sector. Instead of receiving income from rent, they receive it from EMI or mortgage payments. These companies also buy mortgage-backed properties and generate interest-based revenue that is distributed to all investors.

  • Hybrid REITs: These generate consistent income from rent and interest on both owned and mortgage-based assets. Investors can diversify and profit from both sources thanks to it.

  • Private REITs: These are private placements with a small investor base. They are not listed on any stock exchange, nor are they registered with SEBI.

  • Publicly Traded REITs: It is registered with SEBI and listed on the stock exchange (NSE). Shares of it are available for purchase and sale on stock exchanges. Although they are less volatile, they are more liquid.

  • Public but unlisted REITs: Although registered with SEBI, these real estate investment trusts are not listed on the stock exchange. As a result, they are less liquid than publicly traded securities but much more stable because of the low volatility.

Source of Income: -

1. Rental income: Dividends are often paid out on rental income. It might initially return 6 to 8% of the yearly investment, but as rents and occupancies rise, the yield will rise. 90% of the rental income must be distributed to investors as dividends, according to SEBI regulations.

2. Interest income: In REITs, the trust does not directly control the real estate assets. Instead, using a Special Purpose Vehicle (SPV) in which the trust has shares. The SPV distributes the revenue it receives as repayment as interest income to unitholders. Investors can gain from rising returns due to an increase in rents, the leasing of vacant space, the addition of additional properties to the REIT's portfolio through recent developments, the leasing of unfinished projects, and more.

Better rent fulfilment might be the outcome of adding value-added services to the REITs' portfolio. Additionally, a decline in economic interest rates and an increase in the capital value of primary residences may provide investors with improved returns over the course of three to five years. You might make money as an investor if you sell the units.

Factors to consider while assessing REIT investments: -

Prior to making an investment, it can be helpful to evaluate the REIT based on the track record of the sponsor and brand. Retail investors may find it difficult to judge the quality of construction, thus it is crucial to take the properties' locations, potential for rental income, and tenants into account. All of these terms and more can be found in the offer document, which should be carefully read before making an investment.

It is also crucial to consider the REIT's assets' occupancy rates and average lease terms. Property occupiers that you may want to take into consideration are frequently blue-chip enterprises and global corporations.

It can also be helpful to check into institutional investors given the plethora of IPOs that could be released in the upcoming years. Making the right choice can be aided by taking into account additional aspects including the state of the economy, an excess of commercial space, a delay in the completion of properties that are still under construction, and others.

Returns on REITS: -

REITs have historically produced returns that fall halfway between bonds and equities in developed nations. In a nation like the US, rental yields on office buildings range from 3.5% to 5.5%, whereas the yield on a 10-year government bond is currently at 2.5% in an environment of rising interest rates. However, compared to the current 10-year government bond yield of 7.5%, office properties in India have yields that range from 7% to 9%.

However, REIT also see some capital growth. In the last five years, the Nareit REIT index in the US has grown by 4% CAGR. In India, real estate prices have also generally been on the rise, with the exception of the last few years. A long-term investor in a REIT can anticipate a rental yield of 7% to 9% along with capital growth of 4% to 5%, for total returns of 12% to 14%. These returns are on par with or somewhat higher than the current cost of funding in India.

The availability of newer and less expensive options in other places may cause the rental returns to gradually trend lower, which is already happening with office properties in Mumbai.

REITs in India: -

1. Mindspace REIT

  • One of the highest rated portfolios in the Indian real estate market is Mindspace REIT.

  • The portfolio, sponsored by the K Raheja Corp Group, consists of efficiently run office buildings in Pune, Mumbai, Chennai, and Hyderabad.

  • In the previous four years, the corporation increased its revenue to almost 1600 crores, and in 2021, it increased by 5%.

  • Even the stock's net asset worth increased this year from 326.1 to 345.2. (2021).

  • The finest feature of investing in this specific REIT is that, in addition to all SPVs being controlled by REIT, it provides 90% of NDCF as post-tax yield.

  • Only Mindspace Hyderabad is co-owned by the Andhra Pradesh government.

2. Embassy REIT

  • Another REIT with support and sponsorship from Embassy and Blackstone, Embassy REIT, was launched on the Indian stock exchange.

  • It was the first REIT to ever be listed on the stock exchange and based on area, it is the largest REIT to have ever existed in all of Asia.

  • Eight office parks, a 100 MW solar power plant, two hotels, and 42.4 million square feet of operational space are all part of this REIT's portfolio.

  • The REIT's operational space when it is fully occupied in 2021 will be 32.3 million square feet. Bangalore, Mumbai, and Pune are the REIT's three main markets.

  • Over the years, the company's revenue increased significantly, reaching 2360 crores in 2021.

3. Brookfield REIT

  • The Brookfield India REIT is the newest REIT to join the other two on the Indian stock exchange.

  • It is the only commercial real estate portfolio that is institutionally managed and is sponsored by Brookfield AMC. They have 14 million square feet of commercial real estate in Noida, Gurugram, Mumbai, and Kolkata.

  • In order to expand their initiatives, they are also in the process of purchasing an additional 8.2 million square feet.

  • The Delhi NCR region, which accounts for more than 50% of Brookfield India REIT's total asset value, serves as the company's primary market.

  • The portfolio undoubtedly has the potential to see its mark-to-market percentage rise from 31% to 34% in 2023.

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