Real Estate Investment Trust (REIT)

Real Estate Investment Trust (REIT) is an excellent alternative for attracting investments in the infrastructure and real estate sectors. These investment instruments relieve the public funding intuitions and and also allows investors to earn a share of the income through asset ownership. In this article, we will discuss what REITs are, their governing principles, and the benefits they offer.   

Real estate and infrastructure are some of the important sectors that drive a country’s economic growth. The Indian real estate sector is not only the second-largest employment generator but is also poised to contribute 13% to India’s total GDP by 2025. However, a paucity of public funds and the need for continuous capital infusion remains a cause for concern. Thus, given the importance these sectors hold, it has become important to look for other viable funding sources.

What are REITs?

Real Estate Investment Trusts (REITs) in India are security instruments that allow individuals to invest in income-generating real estate properties without directly owning or managing them. In India, REITs are relatively new, with guidelines introduced by SEBI in 2007 and updated in 2014.

REIT companies run business by owning and operating real estate properties that generate income. One of the advantages of this investment instrument is that both large and small corporations can pool their resources and invest in larger projects. Malls, shopping complexes, data centers, etc are some of the examples of properties that can be included in REITs.

REITs provide a great opportunity for investors to receive income as dividends dispersed by REITs which they generate from rental revenue from the Real estate properties they operate.

Types of Real Estate Investment Trust [REIT]

Though REITs can be bifurcated into different sub-categories, there are three major types of real estate investment trusts:

1. Equity REITs

Equity REITs are classified as real estate companies that purchase, manage, construct, and rent out income-generating commercial spaces. The primary income source for this real estate investment trust category is through rents. The rents generated are then distributed as dividends among the stakeholders. Shopping complexes, office spaces, rental apartments, etc are some of the major examples.

2. Mortgage REITs (mREITs)

Establishments that finance the income-generating companies or invest in mortgage-backed securities are called mREITs. The interests generated on mortgage loans are the major income sources for such real estate investment trusts. It is important to note that mREITs face risks from interest fluctuations. An increase in interest rates can cut profits.

3. Hybrid REITs

When companies invest in both, mortgage- and equity-based REITs, they are categorized as Hybrid REITs. Here, the investors generate income from rents as well as interests.   

MSM REITs: micro, small, and medium REITs

In 2023, India introduced MSM REITs, allowing small retail investors to enter the market with smaller amounts compared to traditional REITs. The Securities and Exchange Board of India (SEBI) launched this innovative financial instrument, with a minimum asset size requirement of INR 25 crores, significantly reducing entry barriers. This is a significant improvement from traditional REITs, which require a hefty minimum of INR 500 crore.

This new security instrument can achieve increased competition and potentially lower costs for investors. Unlike real estate funds, it will enable a larger pool of investors to participate in real estate investments due to the reduced minimum asset size requirement at MSM REITs. This boost in liquidity will benefit not only the real estate sector but also all its related sectors within the economy.

REITs in India

The real estate investment trust comes under the Indian Trusts Act (1982) and is regulated by the SEBI. Investment can either be made directly, through Special Purpose Vehicles (SPVs), or in those SPVs which have invested in SPVs (holding real estate assets). Listed below are the main stakeholders in REITs:

• Sponsor: A sponsor is responsible for setting up a REIT and also appoints a trustee.

• Trustee: The trustee takes care of the assets on behalf of the investors.

• Manager: They assume the operational responsibility of a REIT

• Valuer: In terms of financial and technical asset valuation, a valuer ensures transparent valuation of the assets.

How to Invest in Real Estate Investment Trusts?

The Securities and Exchange Board of India (SEBI) had introduced the concept of real estate investment trust back in 2008. But it was only until last year when India’s first REIT— The Embassy Office Parks— came into existence.

SEBI has mandated that REITs should be listed on stock exchanges and they must raise an Initial Public Offering (IPO) to raise money.

How Does a Company Qualify as a REIT?

• A minimum of 80% can be invested in rent generating and completed properties.
• A maximum of 20% can be invested in other assets.
• The REIT should have an asset base of at least Rs 500 crores.
• One REIT cannot invest in units of other real estate investment trust.
• Though a maximum number has not been specified, a minimum of 200 investors is required.

Why Should Invest in REITs?

Although REITs open an avenue to invest in the real estate market, but are they beneficial in the long run? Enlisted are key take ways that will explain why one should invest in real estate investment trust.

• REITs augment capital-raising activities for stalled projects or those constructed by small developers.
• Real estate investment trust reduces the financial burden on banks, thereby allowing them to invest in other critical sectors.
• While buying, maintaining, and selling commercial properties can be tedious, purchasing publicly-traded REITs ensures liquidity.
• The stable dividend yields can generate steady income sources.
• Since REITs are regulated by SEBI, investors’ protection is assured.
• Just like mutual funds, REITs can be purchased like shares.
• Finally, REITs generate direct or indirect employment.

Advantages of REITs

REITs  are one of the best  choices for investors who want to earn income from commercial properties without actually owning it. Firstly REITs pay out most of their income as dividends, giving you a consistent cash flow stream. Moreover, they offer diversification across different property types and locations to reduce risk. and also, investors don’t have to worry about managing underlying assets as  professional managers handle the day-to-day operations efficiently. 

Finally, you can easily buy and sell publicly-traded REIT shares for liquidity. Fifth, REITs have the potential for strong returns that can beat the stock market. Sixth, they provide tax advantages like no corporate tax and lower dividend tax rates. Lastly, you get tangible real estate exposure that can increase in value over time. REITs make real estate investing simple and accessible.

Limitations of REITs

While there are many positives of investing in REITs, there are a few downsides to this instrument. Not only are the real estate investment trusts susceptible to market fluctuations, but the dividends are taxed heavily. Plus, the growth prospects are limited as earnings are distributed as dividends amongst the REIT investors.

REIT Summary

Real Estate Investment Trust Pros	Real Estate Investment Trust Cons
Stable income	Market-linked fluctuations
Highly liquid	Growth prospect not high
Managed by experts	Management fees can be high
Diverse portfolios	Lack of tax benefits

List of REITs in India

Investors looking to invest in REITs should be aware that as per SEBI Website there are five registered REITs in India, Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT, Nexus Select Trust and 360 ONE Real Estate Investment Trust.

Brookfield India Real Estate Trust

Brookfield India Real Estate Trust primarily focuses on leased office spaces, aligning with the recent surge in demands for office spaces that offer steady rental income and its current market cap standing at 10963 Crore, and offering a 7.60% yearly dividend yield.

Embassy Office Parks REIT

Embassy Office Parks is sponsored by Blackstone and the Embassy Group, This was the first REIT listed on the Indian exchange and is a leading investor in Indian Real estate, primarily focused on leased office spaces, they contain a strong portfolio of office properties around India, having many properties in famous IT parks. Currently, its market cap is standing at 35183 crore and providing a 5.85% dividend yield. This REIT is a testament to growing investor interest in the Real estate sector.

Latest News on Embassy Office Parks (REITS)

Recently on 2 April 2024 Embassy Office Parks REITs , decided to raise up to $400 million from investors to meet the growing demand for office space from both global and local companies. The fundraising effort is led by investment banks Morgan Stanley and Kotak, aiming for completion by June.

These funds are going to be used for repayments of the debts and buying the land of Chennai to consolidate the company spread in the city. This is a testimony to Embassy’s strategic expansion and its increasing financial strength that ensure that it can offer the much-needed office space in India’s growing economy.

Mindspace Business Parks REIT

Established by K Raheja Corporation, and listed in 2020, is one of the prominent REITs in India, invested in 2.95 million square feet of leased area in major metro cities in India, offering office spaces, residential, entertainment facilities and retail business.

Currently standing with a market cap of 20399 cores and giving a dividend yield of  5.59%.

Nexus Select Trust

India’s leading real estate investment trust (REIT), Nexus Select Trust, concentrates on the retail consumption space. It boasts ownership of 17 Grade-A urban consumption centers spread across 14 Indian cities such as Delhi, Navi Mumbai, Bengaluru, etc.; these centers offer a total leasable area measuring 9.8 million square feet (MSF). Additionally – its portfolio includes two hotel assets and three office assets. Sectors such as apparel and accessories, hypermarkets, entertainment, and food & beverages (F&B) form the company’s tenant mix. Moreover, actively participating in over 50 ESG initiatives is Nexus Select Trust: a pursuit to generate positive impacts on people and the environment.

360 ONE Real Estate Investment Trust

As per SEBI website, 360 ONE Real Estate Investment Trust (REIT) is a registered intermediary with the Securities and Exchange Board of India (SEBI) as of April 12, 2024, with registration number IN/REIT/22-23/0005. The REIT has perpetual validity, meaning it is a long-term investment vehicle for real estate assets in India

Tips to Invest in REITs

Based on the corporation’s profile, you can harness the potential of REITs by following these tips:

• Invest in REITs that have a broad pool of properties as well as tenants.
• Due to long-term capital appreciation, Real estate investment trusts offer excellent yields. Look for properties that have an excellent track record.
• By gauging into metrics like Funds from Operations (FFO), you should profile the REITs before investing.
• Strong management plays a pivotal role in handling the overall operations of the company. Hence, look for companies that have experienced and professional team of management.

A real estate investment trust can therefore pave way for a new class of real estate assets like co-living or working spaces. REITs not only guarantee high-income returns but, if encouraged, will also provide an avenue for small retail investors to invest in high-value real estate projects.

FAQ

Q: Why should I invest in REITs?

Investing in REIT is a wise choice for investors who want to diversify their portfolio, REIT offer investors to earn dividends from income-generating Real estate properties, which are professionally managed and operated by REIT.

Q: When were REITs introduced in India?

REITs were introduced in India in September 2014. The goal was to democratize access to commercial real estate investment, making it more accessible to the general investors in the stock market.

Q: What are MSM REITs?

MSM REIT also known as Micro, Small, and Medium Real Estate Investment Trusts is a new investment vehicle that was introduced by SEBI in May 2023. Unlike traditional REITs, MSM REITs can have a lower value of assets managed under it, with a minimum amount of INR 25 crores, compared to the hefty amount of INR 500 crore for a normal REIT.

Q: Is investing in REITs good for the long-term?

Yes, investing in REITs is a very good investment choice, especially for long-term investments. With professionally managed properties of revenue-generating rent real estate, REITs offer stable income sources as dividends for the long term, and a hassle-free way of putting stacks into the reality sector without directly managing the properties, liberating investors from the hassle and headache that comes with it.

Q: What is the largest REIT in India?

As per the latest market cap analysis, currently Embassy Office Parks REITs with 336.48 billion INR, is the largest REIT from an investor’s perspective.