REIT (Real Estate Investment Trust) is an investment product that is becoming popular among Indian investors. Launched in 2019, this product is gaining momentum with the recovery of the real estate industry after a slump during the COVID-19 pandemic.
Real Estate is regarded as an asset that is inflation-proof. REITs help investors, especially retail investors to diversify their portfolio without the hassles of investing in physical real estate and also offer regular income for the unit holders.
Launched in 2019, REITs have an Asset Under Management (AUM) of Rs.1,19,313 Cr as of Aug 2023.
The chart below compares the Indian REIT market with other early adopters.
USA | Singapore | Japan | Hong Kong | Malaysia | India | |
Year of Introduction | 1960 | 2001 | 2001 | 2003 | 2007 | 2014 |
Market Size of REITs ($ bn) | 1120* | 74.46* | 103.36* | 27.12* | 8.24@ | 14.32# |
* as on Dec, 2022; * as on March, 2023; @ as on June 2022, # as on June, 2023
Source: statista.com
The market size of real estate in India is expected to reach $1000 billion by 2030 and the REIT investments in India is also expected to gain from this growth.
In this blog, we discuss REITs in detail and you can make an informed decision while considering REIT investments.
Table of Contents
What are REITs? |
REIT Regulations |
What are the types of REITs? |
REIT Structure in India |
What are the various income generated by REIT holders? |
How are REIT income taxed? |
What are the advantages and disadvantages of REITs |
Key Parameters of listed REITs in India |
How to invest in REITs? |
Should you invest in REITs? |
What are REITs?
REIT or Real Estate Investment Trust is an investment vehicle that pools money from investors and invests in income-generating real estate. REITs can invest in both residential properties and commercial properties.
REITs own and/or operate real estate. Some REITs finance real estate or in other words, lend money for real estate development. Hence, the income generated by REITs will be rentals or interest income or a mix of both depending on the type of investment. The income generated by REITs is then distributed to its investors.
REITs help investors to diversify their portfolios by making smaller investments when compared to buying a property. Moreover, it assures regular returns through the distribution of income.
India has 4 listed REITs.
Embassy Office Parks REIT
Mindspace Business Parks REIT
Brookfield India Real Estate Trust
Nexus Select Trust
REIT Regulations
In India, REITs are regulated under the SEBI (Real Estate Investment Trusts) Regulations, 2014.
SEBI mandates REITs to invest 80% of the pooled money in completed and income-generating real estate assets. The remaining 20% can be invested in under-construction properties (up to a maximum of 10%) and other instruments like mortgage-based securities, money market instruments, cash equivalents, government securities, equity shares which derive 75% of the income from real estate activities, etc.
What are the types of REITs?
Typically there are 3 types of REITs.
Equity REIT - Equity REITs own the underlying real estate properties. These REITs collect the rental income, maintain the properties and reinvest into them
Mortgage REIT - Mortgage REITs do not own real estate properties. They lend to the owners of the property and collect interest income. Otherwise, they buy mortgage loans from original lenders, for example, banks and collects interest payment.
Hybrid REITs - Hybrid REITs would be a combination of Equity and Mortgage REITs.
REITs can be also classified based on their trading status into Publicly Traded, Public Non-traded and Private REITs.
Publicly traded REITs | Public Non-traded REITs | Private REITs | |
Registered with SEBI | Yes | Yes | No |
Listed on the Stock Exchange | Yes | No | No |
Liquidity | High | Low | Very Low |
REIT Structure in India
Sponsor - The sponsor is a real estate company that owns the properties prior to the formation of the REIT. Once the REIT is listed on the exchange, SEBI mandates the sponsor should hold 15% of the overall units for a minimum period of 3 years to protect the interests of other investors.
Trustee - These are companies which offer trusteeship services. They are appointed by the sponsor and hold the assets of the REITs. They oversee the REIT manager and ensure compliance with SEBI regulations. Trustees also ensure the timely distribution of income.
Manager - The manager may be a company specialising in property management and would be closely held by the sponsor. The manager is responsible for overseeing the REIT assets, making investment decisions, reporting financial performance, declaration of dividends, auditing, etc.
Valuer - Valuer is an independent entity that periodically assesses the value of the assets.
REITs can directly own real estate or own assets through an SPV.
What are the various income generated by REIT holders?
The free cash available after deducting operational expenses is available for distribution to its shareholders. As per SEBI mandate, at least 90% of this income needs to be distributed to the unit holders.
REITs invest the money pooled from the shareholders either directly in real estate properties or in the SPVs via equity or debt. Accordingly, for money lent SPVs pay interest and principal payment and for equity investment, investors receive rental income and dividend income.
How are REIT income taxed?
The income distributed by REITs include:
Dividend - Taxable at applicable tax rate of the investor if SPV has opted for a concessional tax rate under Section 115BAA; Otherwise exempt
Interest - Taxable at applicable tax rate of the investor
Rental Income - Taxable at the applicable tax rate of the investor
Capital Gains on sale of assets - Exempt, taxed at trust level
Other Income from services and ancillary business - Exempt, taxed at trust level
Loan repayment - While selling the units, the loan repayment received is added to the cost of the unit. The difference between this value and the sale price is the gain on which capital gain tax is applied.
For example, you bought REIT units at Rs. 500 and received Rs. 40/unit in the form of loan repayment during the period of your holding. You sold the units at Rs. 650.
Capital gain = 650 - (500 + 40)
= 110
If you hold the units for less than 3 years, STCG is taxed on Rs. 110 else LTCG is applied.
Capital gain from the sale of units
STCG (Short-Term Capital Gain) at 15% on the gains is applicable when the sale is within 3 years of the purchase
LTCG (Long-Term Capital Gain) at 10% on the gains where gains > Rs. 1 lakh during the sale of units after 3 years.
What are the advantages and disadvantages of REITs
Advantages of investing in REITs
Low initial investment - REITs are a good option for investors looking to diversify their portfolios. Getting real estate exposure through physical real estate is expensive and might lead to an over-weight of real estate in your portfolio. With the help of REITs, one can take the exact amount of exposure the portfolio needs. Moreover, retail investors can own a portion of commercial assets situated in metros or Tier 1 cities which was otherwise impossible. Investors can buy REITs with an initial cost as low as Rs. 300.
Regulatory compliance - An important issue faced by investors considering real estate investment is the lack of transparency involved in real estate deals. Many innocent investors are often prone to the fraudulent practices of middlemen. REITs are registered under SEBI and hence it is regulated by the watchdog. This brings a lot of transparency to the investments.
Geographical and Sector diversification - REITs own properties across geographies and tenants are also from diverse sectors. This reduces the concentration risk which is otherwise high while investing in physical real estate.
Regular Income - 90% of the net cash available after reducing the expenses should be distributed to the REIT unit holders. This ensures the stability of the instrument wrt to other instruments which are more volatile.
Approval of unitholders - In order to safeguard the interests of the unit holders, their approval is required in making major decisions. These include the sale or purchase of properties by SPV or REIT beyond a particular value, borrowing from related parties and deviations in transactions from the proposal of the valuer made by the SPV.
Disadvantages of investing in REITs
Taxable income - Most of the income generated by the REITs is taxed in the hands of the unit holder.
Immature market - Currently, India has only 4 listed REITs. The unavailability of options makes this product less liquid than other stock market products.
Limited growth potential - 90% of the cash available is distributed to shareholders. Leaving no room for reinvestment to more assets.
Key Parameters of listed REITs in India
Let us understand some of the performance parameters of REITs.
Distribution Yield – This is the total income given by REIT during a period as a percentage of the current market price.
Weighted Average Lease Expiry (WALE) - WALE is a measure that calculates the average remaining time until the leases of a property portfolio or a real estate investment trust (REIT) expire, taking into account the lease terms and their respective durations.
Occupancy Rate - Occupancy rate is the percentage of leased or occupied space in a real estate property or portfolio, indicating the level of utilization and income-generating potential of the property.
NAV - NAV is the total value of a real estate investment trust's assets minus its liabilities, and it represents the per-share intrinsic value of the REIT's holdings.
Embassy REIT | Brookefield | Mindspace | Nexus | |
Type | Commercial | Commercial | Commercial | Retail |
Sponsors | Embassy Group & Blackstone Group | BSREP India Office Holdings V Pte. Ltd | K. Raheja Corp Group | Wynford Investments, a portfolio company of Blackstone Group |
Distribution Yield* | 7.1% | 6.6% | 6.6% | First distribution scheduled for Sep 30, 2023 |
Weighted Average Lease Expiry (WALE) as on June 30, 2023 | 6.6 | 7.20 | 6.2 | 5.7# |
Occupancy Rate | 85% | 82% | 88.8% | 96.2%# |
Current NAV | 308 | 239 | 214 | 121 |
Geographical distribution | Bengaluru - 75%, Mumbai-10%, Pune- 9%, Noida-6% | Noida-41%, Gurugram-28%, Kolkata-16%, Mumbai-15% | Mumbai- 37.6%, Hyderabad-37.4%Pune-19.5%, Others - 5.4%, | North- 41.1%, West-30.1%, South- 25.2%, East- 3.7% |
Distribution Income@ | Dividend - 44% Interest- 13% Repayment of debt - 43% Other Income - 0.2% | Interest- 47% Repayment of debt - 52% Interest on FD - 1% | Dividend - 90.2% Interest- 9.6% Other Income - 0.2% | First distribution scheduled for Sep 30, 2023 |
*Annualised value based on the distribution of Q1FY24. # As of Dec, 2022, @ - as on June 30, 2023
How to invest in REITs?
Invest in REIT IPO - Investors can try to wait for the next REIT IPO. However, if there is huge demand among the investor community, then getting allotted the units is challenging. The recent REIT that was launched was Nexus Select Trust Retail REIT and it was subscribed more than 5 times.
Invest via exchanges - If you can’t get the units via IPO, you can always purchase the units from the secondary market or the exchange.
Investing through mutual funds - Investors can invest in mutual funds which in turn invest in REITs in the domestic and international market.
Finally,
Should you invest in REITs?
Real estate should get its due consideration while you plan your investment portfolio because along with diversification, it also acts as an inflation hedge. REITs give the opportunity to invest in diverse real estate assets, from office buildings to shopping centres and beyond, without the burdens of property ownership.
That said, REIT investment is at its nascent stage in India and there are very limited options for investors to invest in. Understanding the mechanics, benefits and risks of REIT investments is crucial. Investors who are keen to be a part of the real estate growth in India can invest in REITs after doing proper due diligence.
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