Should you be investing in REITs (Real Estate Investment Trusts)? While they are the latest buzzword for investors, especially in the property market, do they even make for a viable proposition in your portfolio? Here’s taking a look at what the experts feel in this regard.
Real Estate Investment Trusts or REITs are the biggest buzzword in recent times for the Indian property sector. They offer a seemingly attractive avenue for investors to reap future rewards of their investments. But are they worth it? India already has three such REITs with SEBI listings along with two Infrastructure Investment Trusts or InvITs. The latter are somewhat similar but the only difference is that REITs have ownership of, and operate office or commercial spaces while InvITs operate various types of infrastructure like dams, roads, bridges, power grids, and more.
The three REITs in the Indian market are Brookfield REIT which began in the year 2019, India’s first REIT, namely the Embassy REIT, which started its journey in 2017 and of course, the latest Mindspace REIT which commenced operations from 2020. These REITs are all publicly listed and traded on the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) alike. The InvITs that are publicly listed are the IRB InvIT and the India Grid Trust. Embassy owns and manages a whopping 42.4 million sq ft in its portfolio in collaboration with Blackstone Group as per estimates. This portfolio includes office parks, infrastructure and buildings. The Brookfield Group has a similar approach while the sponsor of the Mindspace Business REIT is the K Raheja Group.
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How did REITs Perform in the Recent Past?
According to leading studies and reports, Embassy Office Parks confirmed 12% growth in NOI (net operating income) for FY2020-21 at Rs. 2,032 crore (year-on-year). Similarly, its revenues witnessed growth of 10% to stand at Rs. 2, 360 crore for this same period as well. It was well-backed up by assets such as two hotels, eight office parks and a 100 MW solar plant in its portfolio. Embassy is the very first and largest REIT in Asia by way of total area.
Net operating income (NOI) also went up by approximately 4% for Brookfield India REIT, standing at Rs. 170 crore for the second quarter of 2021 (year-on-year). It also witnessed extended dividend payouts of Rs. 181.7 crore for holders of units. Mindspace, with its strong portfolio of 30.2 million sq ft throughout Pune, Hyderabad, Chennai and Mumbai, saw NOI of more than Rs. 358 crore in the first half of 2021 (year-on-year). Unit holders also garnered 56% in returns with the India Grid InvIT in FY2020-21 while returns were a whopping 83% for the IRB InvIT in this same duration. These reports and figures clearly state the handsome performance of REITs and InvITs in the country. They have clearly overcome the COVID-19 pandemic while delivering steady value to investors. More REITs are on the horizon for the Indian market as per predictions, with a few set to roll out in 2022 itself.
Considering The Investment Proposition Offered by REITs
Smaller investors will naturally wonder whether REITs will give them similar returns on their investments as compared to regular realty investments. The answer will be a big NO in this case since those hoping to earn anything unrealistic such as 20% or 30% will not be ideally suited for this category. The realistic return on investment will be anywhere around 7-8% per year after adjusting the fee for fund management. However, the risk quotient will be lower with an REIT while the returns will be structured and more practical. REITs are ideal for those investors who want returns and steady income while taking comparatively lower risks. At the same time, investors can get capital gains after selling REIT units and dividend income as well.
REITs will be a good choice (although in a nascent stage in India as of yet) for investors willing to look beyond equity, conventional fixed-income investments and gold for their portfolios. REITs have already generated attractive returns for their investors and unit holders till date, as per reports. Successful listings have also increased overall interest in this new investment option. REITs collect money from multiple investors and the total corpus is deployed in real estate assets that earn income. REITs should be investing at least 80% of assets in rent-generating and completed properties according to SEBI guidelines.
There are REITs emphasizing on properties that generate income like hotels, office space, shopping malls and warehouses. Yet, REITs in the country can only invest in commercial real estate and office spaces. As per the guidelines of SEBI, REITs distribute 90% of income to their unit holders via dividends or interest income or even a combination of the two. There are many REITs that have a three-tier framework which is quite similar to mutual funds. For example, they have sponsors promoting the REIT along with a firm for fund management which manages commercial properties and other trustees who ensure proper money management as per the interests of the unit holders.
There are REIT-holding properties and these ultimately earn money via interest income from SPVs or special-purpose vehicles. This is a completely separate legal entity and also holds various real estate assets on the REIT’s behalf. You will have REITs that are listed and traded on stock exchanges like BSE and NSE where unit prices change on the basis of overall market demand, much in the manner of stocks.
REIT Investments- Yes or No?
It is important to adopt a balanced approach towards this type of investment according to experts. You may invest in high-quality commercial real estate via REITs which you may not be able to do otherwise. SEBI will allow you an investment in REITs with a minimum sum of Rs. 10,000-15,000 with a revised lot for trading at a single unit. Previously, there was a minimum investment required of Rs. 50,000 in tandem with 200 units as a trading lot for the secondary market.
REITs can be good options for your portfolio, giving you steady income along with dividends. You will also gain in the future from appreciation in prices of commercial real estate assets held by the REIT. You can thus get into non-traditional avenues for investments. This works out nicely for most investors since REITs will keep earning rental income from properties and distribute the same amongst all investors while they are also traded like other stocks and unit prices may also rise with growing demand. You can sell units at a higher profit while enjoying capital gains in turn from your REIT investment.
Steps To Assess REITs
- Check overall quality of commercial real estate held by REITs. This will help you scrutinize rental yields from commercial assets throughout various market cycles for understanding overall performance of such investments.
- You can check the overall track record of the manager and also tenants of the office spaces and commercial properties. You should check whether the REIT has MNCs and leading companies as tenants and overall future prospects for rental growth.
- REITs may also enhance their overall profits by developing existing real estate, adding new units while leasing under-construction projects.
- Check the asset distribution of REITs throughout various regions and geographical locations. Choose one which has a well-balanced and diversified portfolio in multiple regions.
- Check the track record and performance of the REIT in terms of returns and overall stock market trends for the same.
- The reputation of the REIT matters immensely in the market as well. They can be profitable investments when interest rates are on a downward spiral in the mainstream economy. Yet, they are not ideal for all kinds of investors.
These are some of the things that you should always watch out for before investing your hard-earned money in REITs. Try and understand the return profile for this specific type of product. It is a hybrid investment product in a way with both debt and equity attributes. The former aspect is because 90% of its net distributable income is distributed amongst unit holders. The equity component is similar to it being traded or listed on the stock exchanges with unit prices dependent upon demand and supply and the market trends. Hence, it offers both capital appreciation and regular income.
Hence, you should anticipate returns as you do in case of your investments in debt-linked products. There are chances of capital gains being generated for the long haul by your income-generating debt instruments. Your returns from REIT investments may also go up with future increases in rentals, thereby enhancing the occupancy levels of vacant portions, new properties being added to portfolios and so on. Perceive REITs from a point of view of generating income regularly while expecting capital appreciation at a moderate level in the long run. Do not ideally go for this as a substitute for equity as per most experts, but more for building an asset that delivers superior returns in comparison to debt instruments in the long haul.
Those with moderate appetite for risk and a thirst to add commercial real estate into their long-term portfolios may seriously consider REITs although you should invest smaller amounts for now. With more REITs forecasted to enter the market in the future, you can consider diversifying your investment amongst two or three such investment options to balance your risks even further. In the long-run, when the market matures, experts feel that people may look at deploying 10-15% of their portfolio for REITs.
Some Other Crucial Points
REITs, as you have already read, have seen trading lot sizes lowered to one from 200 which is a winning proposition for investors. Smaller investors can now affordably invest in REITs which is a good thing for sure. This will lead to more liquidity and trading volumes in the future as per experts. SEBI has also allowed REITs to be eligible for being included in indices. They were previously barred from being a part of these indices. This decision should naturally enhance overall visibility for REITs greatly in the next few years while attracting participation from a wider base of investors either directly or even through ETFs or index funds as per reports.
Real estate has immense investment and emotional value in India. Hence, unlike physical real estate deals which require immense monitoring and big-ticket investments (funding often comes through loans), people can get exposure to a diversified basket of income-generating real estate units including commercial real estate units. They can ensure this by investing smaller amounts in comparison. Hence, on the outset, you should definitely consider investing in REITs but after noting all the riders and watch-outs mentioned above.
The fractional ownership concept does work well for Indian real estate investors especially for lowering the overall risk quotient at the beginning itself. Agreed, real estate is a risky investment but then REITs hold ownership of income-generating assets and distribute their rental income amongst unit holders. This does go a long way in quashing risks although there will always be risks arising from market fluctuations and soon.
While you do earn from income, the biggest risk is that of unit prices coming down on the stock exchanges. However, these are temporary risks and prices may rebound with higher demand. That is the only thing that you should budget for since you will already be earning some income on your investment and ultimately break-even in the future as per experts. If you get good capital appreciation (through rising unit prices) alongside, and manage to sell off your units at a sizable margin, then that is another bonus!
