Are REITS Right?

Indians love Gold & Real estate & fair skin. Maybe not in the same order. Retail Indian investor’s love for equities is a newly developed infatuation that may eventually grow into a deep love but the top spot does go to the other two assets.

Gold has delivered in the last year as it scales new highs day after day. But Real Estate has been dogged by a number of issues. Demonetisation, a general slump in the economy, high unaffordable cartelised prices by the developer to name a few.

Even so, real estate is certainly an aspirational buy for many Indians. A self-owned home is a dream but once that is done there are many who wish to own commercial real estate and earn from it via rents.

There are deterrents though in buying real estate, especially in India.

1. High Investment at entry.
2. Illiquidity of the property once bought.
3. Fear of dealing with a crook developer or the property seller.
4. Once owned, managing the upkeep of the property.

Enter REITS – Real Estate Investment Trusts.

REITs are trusts who own commercial properties like Commercial Spaces, Malls, Warehouses, Distribution Centre’s, Apartments, Hotels, and Health Care Facilities. They lease them out and earn a rental income off those properties.

In short, if you want to have a piece of the action in the commercial property business without the headache of actually buying/selling, leasing properties then REIT can be a vehicle of your choice.

REITs are traded like stocks on the stock exchange.

 Indian Regulators have put in place some rules which REITS have to follow.

• 80% of the assets which are owned by the REIT have to be completed and should be income producing.
• 90% of the Rent or income received by the REIT should be distributed to the shareholders of the REITs
• REITs should be listed on the stock exchange and can be tradable.

The minimum investment is at least Rs.50,000 which is not astronomical for investment in real estate in India.

The REIT will own the properties on the shareholder’s behalf, charge a management fee. If you buy shares of REIT, own a piece of the pie of the REIT and earn the income which is passed on to the shareholders as a dividend.

 The structure of how REITs are formed is a little complex. They can own properties on their own. Or they can it via Special Purpose Vehicles or (SPV’s) which are companies. The Trust either gives loans to the SPV’s or is a shareholder of the SPV.

The SPV can get the income and pay it to the trust who will then distribute it to the shareholders. We need not go into the modalities but let’s say some of the income or dividend which shareholders get from REIT will be taxed and some will not.

Anecdotal evidence says that the expectation is that a REIT will yield between 7-8%.

If the value of the property which the REIT owns goes up or down it will show up as capital appreciation in the price of the REIT.

It’s not easy to trade or buy or sell property with small sums of capital. REITs are a huge asset class in the West, it can take some time to take off in India but it’s worth considering.

In India, Embassy REIT was first listed last year and recently MindSpace REIT closed an Initial Public Offer.