Introduction to REITs and InvITs
Similar to mutual funds, Real Estate Investment Trusts (REITs) facilitate investments into the real estate sector. Here, you can buy and sell units rather than properties, to profit from your investments. If you are looking to invest in the property market without having to buy properties, consider REITs. This structure is governed by SEBI, Real Estate Investment Trusts (REITs) Regulations, 2014, that offers a framework on registration and regulation of REITs in India.
As defined, REITs are used to invest in real estate, such as land and permanently attached improvements to it. However, it does not apply to mortgages or assets falling under the scope of 'infrastructure'.
Similar to REITs, InvITs are structures where investors invest money identical to that of a mutual fund. This option was introduced to open up investments in the infrastructure sector. Regarded as a modified version of REITs, InvITs are built to suit specific circumstances in the country.
Understanding REIT vs INVIT
For a while now, the real estate sector in India has been pushing to introduce REITs and InvITs. While these were permitted, investors were hesitant mainly due to the uncertainty of the tax treatment of pass. But with the recent clarification by the government on the status of pass-through payments in REIT and InvIT, these structures have become more transparent.
Today, the government has also permitted banks and mutual funds to invest in these instruments, subject to specific predefined elements. To understand the difference between REITs and InvITs, let's look into the specifics of each structure.
Similarities between REITs and InvITs
REITs - As a kind of real estate mutual fund, a REIT collects money from investors or unitholders and invests them in real estate projects. The REIT further invest such funds into completed and under construction real estate projects. The returns generated on these real estate schemes are distributed to the investors through dividends. Typically, most REITs are regarded as medium-term development projects.
InvITs - As a slight variation of REIT, InvITs only invest in infrastructure plans with extended tenures. Therefore, a significant road project, highway plan or even a substantial irrigation scheme can attract InvITs for investments. Similarly, the returns generated by infrastructure projects are distributed to InvITs investors through dividends.
Types of REITs
- Equity REITs: These structures generate money when owners lend spaces such as large residential townships, office spaces, shopping malls and the like to tenants on lease. The generated income is then divided among investors through dividends.
- Mortgage REITs: Under this structure, there is no concept of an owner. This arrangement means the finances taken against debt to develop real estate projects. Typically, mortgage REITs generate income through EMIs that are further distributed among investors through dividends.
Deciphering REITs structures
Under the Indian Trusts Act, 1882, REITs are set up as trusts registered with the SEBI. This structure involves three parties. They include:
- Trustees – These are individuals who oversee activities within the REITs. They are registered debenture trustees that are not associated with the sponsor.
- Sponsor - These individuals hold approximately 25% in REITs for the first three years. After the three years, sponsors hold 15% in the REITs. The primary responsibility of the sponsor is to set up the REITs structure and appointed trustees.
- Manager - A company, LLP or a corporate body that supervises and looks after the day-to-day functioning of the REIT. To qualify as a manager, a manager must have at least five years' experience in addition to other requirements, as specified.
Advantages of investing in REITs
- Secured income through long leases
- High liquidity
- Stringent regulations by the SEBI
- Specialised management
- Guaranteed dividend
To understand how you can benefit from investing in REITs, here are some ways.
- Income is typically generated from REITs in the form of rent; this revenue is regarded as a guaranteed income.
- You can purchase REITs just like you do shares in the stock market, but, without the hassle of purchasing actual property or the complications of dealing with real estate legalities.
- On average, REITs yield approximately 10% per annum for its unitholders, that can be decent returns compared to other investments.
A closer look into InvITs
Better known as infrastructure investment trusts, InvITs are relatively similar to REITs. InvITs obtain money from investors to be used as an investment in infrastructure projects to ensure cash flow. Typically, InvITs invest directly or through an SPV into infrastructure projects. However, InvITs can only be done through SPV's in the case of public-private partnership. Just like REITs, InvITs are governed by the SEBI through the SEBI (Infrastructure Investment Trusts) Regulations, 2014 that registers and regulates InvITs. The minimum investment amount in InvITs is Rs. 10 lakh that can be bought in an IPO for ten years or more.
Types of InvITs
- A public offer of InvITs units is mainly invested in completed infrastructure projects.
- An InvIT investment in under-construction projects typically goes for a private placement of its units.
Deciphering InvITs structures
InvITs are mainly set up as trusts that are registered and regulated by the SEBI. Typically, four parties are involved in an InvIT. These include:
- Trustee - An individual, who is a SEBI registered debenture trustee.
- Sponsor - A sponsor can be a corporate body, an individual promoter, a company or an LLP with a net worth of ₹100 crores that has set up the InvIT. Sponsors have to hold InvITs for a minimum of three years unless specified otherwise in the regulatory requirements.
- Investment manager - A corporate body, company or an LLP that manages all the functionalities and business activities surrounding InvITs is regarded as an investment manager.
- Project manager - An individual responsible for executing the project, and in the case of public-private partnership, could be an entity assigned to being responsible surrounding the implementation of the project.
Advantages of InvITs
Regarded as providing a suitable structure to finance infrastructure projects in the country InvITs are considered ideal. This is because, if large infrastructure projects under development in India are delayed due to several reasons such as death, finance expenses, frozen equity of private investors and the like, InvITs can come to the rescue. They can:
- Offer long-term refinancing of current infrastructure projects.
- Assist in retrieving the developer's capital to be used to reinvest into new infrastructure projects.
- Help banks from risky loan exposure by taking out the current high cost of debt with long-term, low-cost funds.
- Assist investors in building diversified investments within the infrastructure industry.
- Attract foreign funds in the infrastructure sector.
- Help bring about enhanced standards of governance in the infrastructure arena.
Many foreign investors are showing a keen eye in the infrastructure and real estate sector of India. In this regard, REITs and InvITs can be perceived as excellent opportunities for taking advantage of India's developing growth in the industry. These structures also offer a significant prospect for institutional investors to diversify their investments. Given the robust governance REIT protocols set up by SEBI in addition to RERA laws, real estate can work out to be attractive investments for the future.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Introduction In India, real estate or property is viewed as an investment product as well as for consumption. For an individual, home equity is typically regarded as a significant and valuable asset, which is why a good deal of thought and analysis goes into buying property. To further propagate investment in real estate, one emerging concept has been the advent of 'Real Estate Investment Trust' (REIT). While still in its incipient stage in India, REIT investing has been a popular and widely used investment route around the world for decades. Aim and objectives of REITs How do real estate investment trusts work? Understanding how do reits work is knowing how mutual funds work. Investing in REIT can enable you to invest in a pool of real estate properties without having to own the physical property itself. REITs invest in revenue yielding assets, primarily large commercial spaces and establishments, and work as a pass-through entity for investors looking to purchase into this specific portfolio of instruments. Currently, to know how REITs work in India, it can help to look at the latest IPO listings within the commercial sector. Also, a growing interest is now seen for retail spaces, shopping malls, large residential spaces and hotels. This sector has yet to gain a toehold in the country, but because rental incomes on commercial assets are far higher than the returns on other asset classes, it is likely to get a boost in the coming months. The principal aim of investing in REITs is to generate revenue distribution and the long-term appreciation of assets. In this structure, assets are professionally managed and the income received from them, typically in the form of rent, is effectively distributed among REIT unitholders. This income is distributed after accounting for charges, including the management for real estate investment trust work and property management fees. Investing in REITs The investment process is easy and straightforward. Unitholders invest through initial public offerings, for the REIT to buy into a pool of real estate assets. These properties are then leased to interested tenants. The flow of income generated through rents is, in turn, directed back towards investors through dividends, thus forming a mutually beneficial situation for both parties. As an investor, you can view REITs as an additional mode of investment. It can provide you with a regular stream of income with the likelihood of asset appreciation over the course of its tenure. Here are some of the essential benefits of investing in REITs. Tax exemptions: Based on Income Tax laws, you stand to benefit from a distribution of at least 90% of taxable income every year as part of joint investors or unitholders, while enjoying tax transparency treatment. As an individual investor, the distribution you receive also enjoys tax exemption treatment. Clarity and flexibility: If you wish to receive information on REIT prices or trading REITs, you can access them online through trading hours. Diversification: REITs can be a part of a percentile of a well-diversified portfolio among stocks, mutual funds, commodities, precious metals and others. Ease of use: One of the most primary advantages of investing in REITs is the ease through which you can invest. Average investors can easily access relatively expensive properties, specifically commercial real estates, in the form of mutual funds. The current state of REITs in India India's first real estate investment trust that listed on the stock exchange in 2019 - Embassy Office Parks - was a resounding success. Viewing this, several developers are now planning to join the fray. For instance, Mindspace Business Parks REIT, backed by K. Raheja Corp. and private equity investor Blackstone, recently sought SEBI's permission to launch an IPO. Other interested developers planning to list their REITs include the Prestige Group and RMZ Corp. Besides, Godrej Properties and Pune-based Panchshil Realty have also displayed interest. What REIT investments mean for you As an investor, you can take advantage of high-quality rent yielding properties by investing in REITs, which would otherwise be high-priced. REITs units, when listed on the stock exchange, can help you avoid liquidity issues that real estate investments generally go through. This further means that as an investor, you can opt to bear only a fraction of the overall cost by purchasing only a few units. Besides, the entry cost is minimal compared to purchasing an actual property. A critical aspect that works in favour of REITs is safety and security. SEBI mandates that 80% of the real estate portfolio owned by a REIT must consist of completed and revenue-generating real estate properties. The remaining 20% of the asset value can be invested in under-construction assets. Revenue from REITs You can receive income from REITs under two heads. Rental income: This is typically distributed as dividends. Initially, it could yield 6 -8% of the yearly investment, and gradually increase as rents and occupancies grow. SEBI stipulates that 90% of the rental income must be paid out to investors as dividends. Income from interest earned: In REITs, real estate assets are not directly owned by the trust. Rather, through a Special Purpose Vehicle (SPV) in which the trust owns a share. The revenue that the SPV repays is distributed to unitholders as interest income. With the rise in rents, leasing of vacant space, adding new properties to the REIT's portfolio through recent developments, leasing under constructed projects, and more, investors can benefit from increasing returns. Value-added services to the REITs portfolio could result in better rent fulfilment. Besides, a decrease in interest rates in the economy and an increase in the capital value of primary properties could benefit investors with enhanced returns over 3-5 years. As an investor, you could also gain when selling the units. For instance, the REITs issue price for Embassy Office Parks was ₹300. On February 3, 2020, its REIT closed at ₹402.23, over 34% of its issue price in just ten months. Factors to consider when evaluating REIT investments It can help to assess the REIT before investing, based on the sponsor's and brand's track record. Evaluating the quality of construction can be challenging for retail investors, and hence, it is imperative to consider the location of the properties, it's rental potential and the tenants. These details and more are accessible and available in the offer document that must be scrutinised prudently before investing. It is also essential to look into the occupancy of the assets within the REIT and the average time of the lease. Blue-chip companies and multinational corporations are typically property occupants that you may want to consider. Given the slew of IPOs that could be launched in the coming years, it can also help to look into institutional investors as well. Considering other factors such as economic downturn, an oversupply of commercial space, delay in completion of under-construction properties and similar factors can help in making the right decision. Conclusion REITs were introduced in India in 2014, but over the past few years, stringent regulatory changes have made this structure appealing to developers while also shielding the interests of investors. Consider REIT as revenue-generating assets that can offer you better yields than fixed deposits in the long run. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
There are different types of investment avenues in the market and each of these avenues promises you a compounded rate of growth if you remain invested. Compounding of return means earning a return on the return earlier generated. So, if you invest INR 100 and earn a return of 10% in the first year, the amount would become INR 110. Thereafter, in the second year, you would earn 10% on INR 110 giving you a return of INR 11. This compounding helps grow and multiply your wealth considerably over a period of time. In the case of market-linked investments, the rate of return is not guaranteed. It varies over the investment period. To know the average rate of return on your investments, the concept of CAGR is used. Let’s understand what CAGR is and how it helps you find the growth of your market-linked investments. What is CAGR? CAGR’s full-form is Compound Annual Growth Rate. The Compound Annual Growth Rate, in simple terms, is the average rate of return of an investment over a one year period. CAGR takes into account two important factors - the time period of the investment and the fluctuations in the return. Since the returns vary depending on the market fluctuation, finding the return over a specific time period becomes difficult. CAGR gives you the average growth rate offered by the investment over the said time period. CAGR shows the approximate growth rate considering that there is no market fluctuation and that the returns earned are reinvested into the investment. How to calculate CAGR? It is very easy to calculate CAGR. There is a CAGR formula which you can use to find the Compound Annual Growth Rate of your investment. The CAGR formula needs three important details which are as follows – Value of the investment made initially (VI) Term of investment (T) Value of the investment at the end of the term (VE) Using these three inputs, the CAGR formula becomes – CAGR = (VE / VI) ^ (1/T) – 1 Let’s understand with an example – Mr. A invested INR 10,000 in a market-linked investment avenue. After 3 years, the value of his investments stands at INR 13,500. The CAGR for Mr.A’s investment could be calculated as below – VI – INR 10,000 T = 3 years VE = INR 13,500 CAGR = (13500/10000) ^ (1/3) – 1 = 10.52% How CAGR helps understand the mutual fund growth rate? Mutual funds are market-linked investment avenues which do not offer a guaranteed rate of return. Since the returns are subject to market fluctuations, CAGR becomes an accurate tool to measure the performance of the fund over a specified period. Investors can check the annual CAGR of mutual fund schemes and use the rate to find out which scheme offers better returns than others. The fact sheet offered by the mutual fund house contains returns generated by the fund over different time frames. These returns can prove to be confusing and so CAGR is an easier alternative to understand the performance of the fund. CAGR acts as a ready reckoner for investors to assess returns from a mutual fund scheme and also highlights the compounding of returns on mutual fund investments. Important points to know about CAGR The investment risk inherent in the scheme is not highlighted by CAGR. CAGR is merely a yardstick to measure the growth rate CAGR proves to be a good measure of growth for a short-term period, i.e. up to 6 or 7 years. If you are considering long-term investments, the growth trends over a short-term period would be averaged out. In such cases, CAGR would give an average rate even if the fund performed excessively well in a two or three year period and then the returns fell in later years. CAGR changes every year since the investment period changes CAGR for two investment funds can match one another even if the funds are different. This might happen if one fund performed well initially and the other one performed well in the last few years. As a result, the performance is averaged out and the CAGR Other modes of calculating returns from investments Besides CAGR, there are other ways to calculate the returns generated by market-linked investments. These ways are as follows – Returns since launch Under this model, the return earned by the fund ever since it was launched and till the present date is calculated. Trailing returns Under the trailing returns approach, you measure the performance of your fund daily, weekly, bi-weekly, monthly or annually. Annualised returns Annualised returns are calculated as the geometric average of the return yielded by the fund over a given period of time. CAGR v/s Absolute returns Absolute returns measure the total return yielded by an investment. The time period is not considered. CAGR, on the other hand, measures the return over a specific time period. For instance, in the previous example, INR 10,000 grew to INR 13,500 over a 3-year period. The absolute return would be 35% since it measures the total return earned on the investment. However, when CAGR is considered, the time period of investments is also taken into consideration thereby considering the time value of money. As such, CAGR comes to 10.52% which is a more realistic figure. While absolute returns show the returns generated, the time period is missing. You cannot figure out how many years it took the investment to generate this return. But CAGR shows you the annual return making it easier to make a judgement on the performance of the fund. The next time you invest in mutual funds, stocks or other market-linked investment avenues, consider their CAGR to choose the fund or investment which has better returns over its peers. So, visit IndiaNivesh and find out a mutual fund scheme of your choice and then compare the scheme’s CAGR with its peers to choose the best performing fund. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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