What Is a REIT (Real Estate Investment Trust) & How it works?

Posted by Rushabh H. Mehta | Published on 06 Mar 2020
Image
What Is a REIT (Real Estate Investment Trust) & How it works?

What is REIT?

A well-diversified portfolio is important to achieve optimal returns on your investments and also minimize the overall risk of your investments. To create a balanced portfolio, it is important to invest in various asset classes that have a lower correlation to each other. A majority of investors today have a healthy mix of stocks, bonds, and gold in their portfolio for the same reason. Real estate, too, is an important asset class for a well-diversified portfolio as it has a very low correlation to stocks and bonds. However, even though, investing in real estate can be rewarding, not many investors have exposure in real estate primarily because real estate investments, especially, commercial real estate require huge capital that is financially out of reach for retail investors. REIT investments provide the perfect opportunity for such investors to diversify real estate and create an additional avenue of growth and income from their portfolio without actually owning any real estate properties.

What is REIT?

REIT or real estate investment trusts are securities that trade in real estate properties. REITs are companies that own, manage or operate income-generating real estate properties and provide investors with the opportunity to invest in these real estate assets that are otherwise out of their financial reach. REITs invest in commercial spaces like offices, shopping complexes, multiplexes, hotels, etc. and create a steady source of rental income through these investments.  

In a simple definition, REITs can be considered as a mutual fund of real estate, wherein investors buy shares of REIT and contribute money to a pool of funds that are professionally managed and invest the money in income-generating properties. Just like mutual funds REITs have a three-tier structure of having a sponsor- who has the onus to set up the REIT, a fund management company for selecting and operating the properties and a trustee to safeguard the interest of the unitholders. REIT investing provides an opportunity for investors to earn regular returns from the rentals and leasing income of the trust and also long-term gains by way of capital appreciation of the underlying real estate.

How does a company become eligible for REIT?

A company is not eligible as REIT only because it owns some real estate. Here are some specific requirements which it needs to fulfil to become eligible for REIT-:

  • REITs must have an asset base of Rs 500 crores
  • REITs must distribute 90% of their profits as dividends to the unitholders
  • REITs must invest 80% of the funds in real estate that is generating income, and only 20% can be invested in under-construction properties
  • REITs must update their NAV twice in a year

How does real estate investment trust work?

The real estate sector has immense potential in India and as the government is continuously working towards creating world-class infrastructure and development of the real estate. As quality properties are high on investment so they are potentially out of reach for the common man. However, investments in REIT funds enable investors of varying financial capacity to invest in the real estate sector and participate in the growth and development of the real estate and earn profits from their investment.  REIT funds are the perfect gateway for investors to invest in high-quality real estate assets by making them affordable and within their reach.

Broadly speaking there are three types of REITs which currently operate in India

  1. Equity REITs- These REITs own large real estate properties like shopping malls, business centres, hotels, residential townships and make money by giving properties either on rent or lease agreements. The rental income earned is distributed as dividends to the unitholders
  2. Mortgage REITs- These REITs are not owners but provide finance to real estate projects of developers, builders, owners, etc. and earn income in the form of EMI and the Net Interest Margin is distributed as profits among the unitholders
  3. Hybrid REITs- These are companies which have both Equity and Mortgage REITs

What are the advantages to investors investing REIT?

  • REIT investing is the simplest and least capital intensive way of investing in real estate making it affording for an average investor to invest in them
  • REIT, even though, are securities but represent real-estate, that is a separate asset class, thus diversifying your portfolio which has a low correlation to stocks
  • As most of the investments in REITs are in steady income-generating properties by way of rentals, they are a reliable source of income for investors looking for a steady income. Moreover, they provide the opportunity of capital appreciation over the long-term as the value of the property goes up
  • Strict regulations and norms of SEBI ensure transparency in operations and decrease the chances of fraud

What are the risks of investing in REIT?

Real estate is a great asset class for long-term investment purpose, and REIT provides a great alternative for retail investors to invest in real estate directly, as in investor you should be aware of certain REIT risks associated with your investment-

  • The minimum investment amount of REIT is Rs 2 lakh, which is small when compared to directly investing in real estate but still a sizeable chunk of investible surplus for many investors
  • Mortgage REITs are debts used to finance debts and subject to interest rate risk and default risk of the debtors
  • REITs are required to pay 90% of their income as dividends, thus leaving very little capital for the trust to acquire newer properties
  • REITs invest in high investment assets and hence trading in and out of REITs involves high transaction costs

CONCLUSION

The regulatory framework for REIT in India is very stringent, and SEBI guidelines and norms for REITs ensure that the interest of investors is safeguarded at all times when it comes to REIT investments. If you are looking out for exposure in quality real estate, then REITs may be the perfect investment option for you. Reach out to our experts at IndiaNivesh, who can guide you with the ins and outs of REIT investment in India best suited for you.

 

 Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

PREVIOUS STORY

Internal Rate of Return (IRR) – Meaning, Calculation & Advantages

Posted by Rushabh H. Mehta | Published on 06 Mar 2020

In the world of finance and investments, very often you hear the term IRR or internal rate of return. Many a time, company officials make announcements of going ahead with a project because it is financially viable. A company uses a variety of financial tools and metrics to evaluate the commercial attractiveness of a project to make its operating and investing decision. One of such vital parameters to determine the attractiveness of the project and whether or not a company should invest its resources in it is by calculating the internal rate of return, or IRR of the project.   What is the Internal Rate of Return (IRR)? Internal rate of return (IRR) is a capital budgeting technique to gauge the performance of an investment and the help determine its profitability. IRR is expressed as a percentage, and it is the discount rate at which the net present value of an investment or project becomes zero. IRR takes into account the time value of money and capital inflows and outflows over the life of the investment. As the full form of IRR suggests, it is the internal rate of return and does not take into account external factors like inflation, state of the economy, etc. at the time of calculating returns. In simple terms, IRR is the breakeven rate of a project. If the IRR of a project is high and exceeds the required rate of return, then the company will go ahead and invest in the project, but if the IRR is low and below the required rate of return, then the company will not go ahead with it. It also helps analyze and compare between different projects and how to prioritize projects based on their IRR. How is IRR calculated? Calculating the IRR of a project is not a straightforward calculation. It requires trial and error as we try to arrive at a percentage wherein the net present value of the investment will become zero.  IRR of a project can be easily calculated through financial calculators or using the IRR function in excel. The formula for IRR is    0= P0 P1(1 IRR) P2/(1 RR)2 P3/(1 IRR)3 P4/(1 IRR)4 ...   Pn/(1 IRR)n Where P0, P1 ... Pn are the cash flows in the period 1, 2, .., n, respectively and IRR is the internal rate of return of the investment. Here is an example to show how to calculate IRR- A company is considering the purchase of machinery to increase its sales, whose cost is Rs 3,00,000. This new machinery has a life of three years, and it will help the company generate an additional profit of Rs 1,50,000 per annum in the three years, and the scrap value, in the end,  is Rs 10000. The company’s rate of return from investing the cash in other investments will fetch a return of 15%. Now, if we want to find out if buying the machinery is a better option or not, we have to calculate IRR.  0 = -Rs 300,000 (Rs150, 000)/(1 .243) (Rs150,000)/(1 .2431)2  (Rs 150,000)/(1 .2431)3  Rs10,000/(1 .2431)4 The net present value of the investment becomes zero when the IRR assumed is 24.31% which is much higher than the required rate of return of 15%. Thus, the company must purchase the machinery.   What are the advantages of using IRR in investments? There are many advantages of using IRR technique at the time of analyzing investments and include- Time Value of Money is considered One of the significant benefits of using the IRR technique is that it takes into account the time value of money at the time of calculating the returns from an investment.  This makes IRR credible and accurate to determine the future earning potential of the money A simple technique for analysis Using the IRR technique to assess the profitability of the project is straightforward. If the project IRR is higher than the cost of capital or required rate of return, then it is advisable to go ahead otherwise not. Helps rank and compare projects from an investment perspective When you have to make a comparison between two or more projects, IRR is useful in comparing and ranking projects depending on the yield. The project with a higher IRR is preferred. Limitations of IRR technique Even though IRR is an important financial metric in capital budgeting, it has its limitations. The major drawbacks of using IRR technique are- Project duration, size, etc. not considered One of the most significant disadvantages of IRR is that it does not take into account important aspects such as the scale of the project, time taken for completion, etc. into account at the time of comparing projects, which can be misleading. The assumption about the reinvestment rate Another limitation of using the IRR technique is that it assumes the same reinvestment rate for all the future cash flows throughout the tenure of the project, which is not practical as not all the future cash flows may have the same reinvestment opportunity. One of the best ways to overcome the limitations of IRR is that one should not use IRR in isolation but use the NPV method and IRR together in capital budgeting to understand the profitability of the project.  Another option is to use the MIRR, which is the modified internal rate of return, which helps overcome the assumption of reinvestment at the same rate.  Conclusion IRR plays an important role in determining the return from your investments, and if you want to use IRR in practice, then open a Demat account with IndiaNivesh and get the correct guidance from our experts to get desirable returns on your investments.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

read more

NEXT STORY

What is Side Pocketing and How it affects Mutual Funds

Posted by Rushabh H. Mehta | Published on 06 Mar 2020

What is Side Pocketing, and How it affects Mutual Funds? The mutual fund industry in India is growing at an exponential pace, and as an industry, it is continuously widening its investor base and also increasing its geographical spread. The market regulator SEBI plays an important role in the regulation of the mutual fund industry, protecting the interest of investors at all times and taking adequate measures as and when needed to boost investor confidence in both equity and debt mutual fund schemes. Side pocketing in mutual funds is one such measure taken by SEBI to protect the interest of investors in debt mutual fund schemes in case of troublesome debt in the portfolio of the scheme. What is side pocketing in mutual funds? Side pocketing in mutual funds is the creation of a separate portfolio within the fund’s portfolio for assets that are illiquid, risky or distressed at the moment and have been downgraded by rating agencies below investment grade. Such assets are ring-fenced from the other high quality, liquid assets in the portfolio to protect and treated differently for investment and redemption to safeguard the interest of old as well as new investors in the scheme. Side pocketing was introduced by SEBI in December 2018 after the IL&FS fiasco, where it failed to meet its debt obligations and repay its lenders and creditors. This, in turn, put significant pressure on various mutual fund schemes that had IL&FS papers as a part of its holdings. The complete mayhem resulted in substantial volatility in the debt and money market instruments resulting in redemption pressure in mutual fund schemes. High-quality, liquid assets in the schemes were sold by the funds to meet redemption requests resulting in increasing the exposure of remaining investors in the illiquid assets.  Side pocketing mechanism is allowed only in debt mutual fund schemes. How does it side pocketing work? Whenever a debt instrument is downgraded by credit rating agency from an investment grade to a non- investment grade, the mutual funds have an option for creating a side pocket and segregating illiquid assets from the high-quality liquid assets. The existing investors are allotted units in the leading portfolio and segregated portfolio on a pro-rata basis. No redemption and subscription are allowed in the segregated portfolio. Moreover, SEBI makes it mandatory for the fund to list the segregated portfolio on the stock exchange within 10 days to provide an exit window to the existing unitholders. Depending upon their outlook, investors can either continue to hold their investment in the segregated portfolio or choose to exit at the prevailing rate. Any future recovery from the illiquid assets is credited in the side pocket portfolio and paid to the unit holder in proportion to his holdings. Side pocketing impact on mutual funds and AMCs Side pocketing aids mutual fund schemes from selling quality assets in its portfolio to meet sudden redemption pressure in a panic situation. Creation of side pockets help insulate the remaining portfolio from troublesome debt To ensure that mutual funds do not misuse side pocketing, SEBI also suggests a list of safeguards that AMCs may implement.   Benefits of side pocketing in mutual funds Over the last few months, many debt mutual fund schemes have side pocketing a portion of its portfolio if the ratings of the investment paper in its holdings have been downgraded by the credit rating agency. Side pocketing is important to protect the interest of retail investors in case of illiquid assets because credit defaults accompanied by information asymmetry, results in institutional investors taking advantage of the situation. The benefits of side pocketing in mutual funds include- It is an important mechanism to ensure stability and reduce volatility in the debt market by addressing the issue of redemption pressure in case of troubled assets It prevents distressed assets from hampering the returns generated by high quality, liquid assets At the time of selling the segregated assets, only those investors who have units in segregated assets on the record date are entitled to the proceeds, thus ensuring a fair treatment To avoid unfair advantage of lower valuation, fresh inflows are allowed only in the non-side pocketed portfolio As side-pocketing helps curb redemptions, it helps in stabilizing the net asset value (NAV) of the scheme In case of a situation arising due to sudden illiquidity, it provides cushioning to the portfolio. The most significant benefit of side pocketing is that all investors, retail or institutional are treated at par CONCLUSION Globally, side pocketing is one of the best mechanisms to protect the interest of investors, and SEBI as a regulator ensures that it takes timely measures and imposes adequate regulations for the AMCs to safeguard the interest of investors at large. If you have any specific query or doubt about side pocketing in mutual funds schemes, contact our experts at IndiaNivesh for guidance.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

read more

Are you Investment ready?

*All fields are mandatory

related stories view all

  • Know What is Infrastructure Investment Trusts & its Importance
    Posted by Rushabh H. Mehta | Published on 09 Mar 2020

    Critical to any emerging economy are two significant sectors – the country's infrastructure and real estate. And keeping these two sectors in mind, it must be noted that a well-build infrastructural arrangement thrusts a country's overall development. Having robust infrastructure is also crucial in facilitating a steady inflow of foreign investments and private equity. A fresh inflow of funds is vital in expanding the capital base necessary for the growth of these crucial sectors in a country's economy. Besides, such investments are also essential in boosting the growth of the segments in a sustained manner.   Understanding Infrastructure Investment Trust (InvITs) To know what is invit, it can help to understand and know the invit full form. Regarded as a collective investment scheme similar to a mutual fund, an Infrastructure Investment Trust (InvIT) is crucial in enabling the direct investment of money from individuals and institutional investors towards infrastructure projects. Keeping in mind the vast infrastructure needs of the country, InvITs can allow developers of infrastructure projects to monetize their assets by drawing numerous projects under a single trust structure or infrastructure investment fund. Falling under the ambit of the SEBI, InvITs are regulated the SEBI (Infrastructure Investment Trusts) Regulations, 2014. Detailed guidelines on the public issue of units of InvITs are declared in SEBI's latest circular.   What is an infrastructure investment trust? As a first of its kind long-term instrument, InvITs can be structured as funds with an extended tenure or as an open-end structure. Currently, government securities (G-Secs) are the only other instruments with a very long tenure like InvITs. As a structure built in a tiered format, InVITs have a sponsor at the helm. This sponsor sets up the InvIT that further invests into suitable infrastructure schemes directly or through special-purpose vehicles (SPVs). With regards to public-private partnership projects, InvIT investments can only be made through SPVs.   Latest developments in InvITs In 2016, India Grid Trust filed its the first draft offer document for India's first-ever power sector InvIT with SEBI. Following this, the first public offerings of InvITs came to the stock market in 2017 from IRB Infrastructure Developers Ltd, and Sterlite Power Grid. Interestingly, in 2019, several, large, private InvITs such as Reliance Industries Limited setup investment trusts for its gas pipelines and telecom towers worth Rs. 38,000 crores. Early this year, the Infrastructure Leasing and Financial Services (IL&FS) group proposed creating an InvIT to house the group's road assets and compensate lenders by offering units at zero cost. Currently, five public infrastructure trusts have raised approximately Rs 40,000 crores. A recent report by CRISIL revealed that InvIT issuance could further grow fivefold to Rs 2 lakh crore within the next two years.   Characteristics Under SEBI regulations, InvITs must ensure they distribute 90% of their net cash flows to investors. A leverage of 49% is placed on the InvITs net asset value. For publicly placed InvITs, or under construction assets, a cap is placed on its exposure. Sponsors responsible for setting up the InvITs are also accountable for appointing the trustees. The sponsor holds a minimum of 15% of the units issued by the InvITs, with a lock-in period of three years from the date of its issuance. Under the InvITs regulations, companies are also required to maintain specific investment ratios, such as 80% of investments in completed and revenue-generating assets. The specified minimum investment limits are pegged at Rs. 10 lakh per investor, as can be seen in all the InvITs filed so far. The investment in such projects helps investors in reaping a decent portion of the income as yields. However, given that regulations in this avenue are new, most InvITs that are likely to raise money will have a negligible or a very short track record.   Distribution of dividends InvITs are required to distribute dividends regularly. These dividends must be distributed once in every six months. The amount available for distribution depends on the interest income or the InvITs own dividend, as well as principal payments from its portfolio. If you are an eligible non-resident investor, it can help to note that distributions, dividends and refunds if any will be payable in Indian rupees only.   The Union Budget 2020 and InvITs To ensure that tax treatment is uniform across InvITs, the Union Budget 2020 extended the definition of business trusts to include unlisted InvITs as well. This move could help in further boosting investments in the infrastructure space. Also, the recently announced Union Budget 2020 accorded tax passes through status to private unlisted InvITs. Until recently, only publicly listed InvITs were granted tax exemptions. Given the tax exemption for the private InvIT structure, sponsors and investors can now look to divest their infrastructure assets through this route. Until recently, InvITs could be placed privately but had to be listed on exchanges. This meant that several regulations had to be dealt with regarding insider-trading and price-sensitive information. Now, with privately placed InVITs, these are done away with as they are privately negotiated structures.   Tax exemptions for InvITs As an investor in InvITs, you can benefit from favourable tax exemptions, such as dividend distribution tax. As a unitholder of InvITs, you will be required to pay tax on the dividend income at the appropriate income tax rate. But, if you hold InvITs units for over three years, you can enjoy tax exemption on capital gains and dividend income if sold through the stock exchange. However, NRI unitholders have to pay a tiny withholding tax for interest income. Besides, you can also benefit from the pass-through structure of InvITs authorising the allocation of a minimum 90% of net-distributable cash and zero dividend distribution tax.   Importance of InvITs  Since infrastructure is an integral component of a country, it requires requisite public funds to stimulate their growth. This is why additional channels of financing, such as InvITs are established. As an innovative vehicle, InvITs are crucial in monetizing revenue-generating infrastructure assets and helping investors or unitholders to invest in such projects without possessing them. As a monetisation medium, developers can profit from InvITs by using investor capital to fund new infrastructure projects. In turn, investors or unitholders receive liquidity to investors when the units of the project are listed on stock exchanges.   Conclusion  With the new tax pass-through benefit, large investors such as pensions and sovereigns can now consider private InVITs to become attractive investment structures. Given its yield generating potential, regulated by SEBI, easy liquidity and a compulsory requirement to distribute cash regularly as and when produced, InVITs hold the possibility of becoming a lucrative and promising investment avenue.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

    read more
  • What is Difference between REIT and INVIT?
    Posted by Rushabh H. Mehta | Published on 02 Mar 2020

    Introduction to REITs and InvITs REITs 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'. InvITs 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 Transparency Guaranteed dividend Diversification 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.   Conclusion 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. 

    read more
  • How do REITs (Real Estate Investment Trust) work?
    Posted by Rushabh H. Mehta | Published on 02 Mar 2020

    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. 

    read more