What is REIT? And how will it affect Real Estate Market in India?
REIT stands for Real Estate Investment Trust
REIT got launched in India during March 2019, with Embassy REIT as the first IPO. REIT is a vast topic of discussion if we go into details like structure, taxation, rules, and regulations. In this article, we shall discuss only the basic aspects of this new asset class.
Real Estate is one of the most preferred investment options and many people dream to invest in real estate, but properties are expensive and require huge capital for investment. Is taking a loan at 8-10% and earning a rental yield of 4-6% advisable? And what if a situation such as Covid-19 arises and the tenant says that he can’t pay rent as his business was closed for the past 3 months due to lock-down. Hence, unless you are an HNI, it is difficult to invest in real estate.
So, how can a person having small investable capital, get a piece of this huge Real Estate cake? It was not possible in India before March 2019. But now it’s possible.
Most of us would be familiar with Mutual Funds; one invests in mutual funds, which in turn invests in a number of stocks or bonds. Whatever returns/dividends/interest is generated from those stocks or bonds gets distributed among unit holders according to the amount of investment in the mutual fund.
A single share of few listed Companies is above Rs. 2,000 today and you can’t buy less than 1 share, but if someone has less than Rs.2000 to invest, they can still buy some units of the mutual fund, which in turn might have invested in such a blue-chip company. The same case is for bonds, where individually the ticket size is much higher.
REIT is a sort of mutual fund. As a mutual fund invests in stocks or bonds, REITs own various real estate properties. The company, who has launched the REIT, leases out these real estate properties and collects rent from all its tenants.
REITs are operated by experts in the real estate market; they have experts to take care of documentation and other legal matters. They also have data and market studies on future earnings from real estate which they own or are proposed to invest.
Embassy REIT has high-quality office buildings, parks, and a few hotels. Their assets are given on rent to reputed companies like global investment banks, IT firms, etc. In a normal scenario, one doesn’t expect these companies to default on their rental payments.
Through REIT the investor makes around 5-7% from a safe rental yield and also gains an appreciation of property value. Whereas rental income acts like an interest bearing bond, property value appreciation acts like equity, i.e., volatile/uncertain. But just like a good quality company is expected to give positive returns from their stock, a good quality developer is expected to invest in properties that may increase in value.
These kinds of companies are listed under a special “trust” like an arrangement called REIT. This REIT is traded on the stock exchange just like share and its value goes up and down just like any share.
The REIT has to compulsorily distribute at least 90% of their income, which can be tracked from their filings. These are generally transparent and hence if REITs are making money, investors will earn too.
REITs can have any property which earns rentals such as Malls, Warehouses, school/colleges, hotels, retirement homes, casinos, etc. However, the reputation of the developer, location of the property, type of property, quality of the tenants, diversity in tenant base, occupancy level, etc are the key criteria while evaluating a REIT
The economic downturn, high-interest cost, regulatory changes, lower diversity in tenant class, revenues only form rentals and no other income sources are a few risks that will remain a hindrance.
In the Indian scenario where Real Estate leasing is mostly unorganized especially in residential leasing, REITs are going to play a crucial role. REIT structure might bring liquidity and transparency in the Indian Real Estate Market which is one of the most dreaded sectors. This will be slow in gaining traction before this becomes a mainstream asset class.
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