Real Estate Investment Trust (REIT) are an emerging investment instrument in the Indian Economy which enable retail investors to gain exposure to real estate without owning the physical property and investing a behemoth amount. REIT’s have a structure similar to mutual funds with a portfolio of income-“Rent” earning investment properties. According to a report by Care Ratings, there are primarily three types of REITs :
1) Equity: The REITs which own and service the underlying income generating properties
2) Mortgage: The REITs which have a re-course right to income generating real-estate investments by the virtue of granting them loans.
3) Hybrid: These REITs have a risk balance as the portfolio of realty is a combination of equity and debt investments with underlying investments as income generating properties.
REITs are beneficial to the Indian investors’ primarily on the following grounds:
The REITs provide investors a diversification benefit in contrast to investing in traditional instruments of equity and bonds. It has been mandated by Securities and Exchange Board of India (SEBI) to distribute 90% of the Earnings Available for Distribution to Shareholders to the holders of REIT shares. Hence, these instruments assure investors a steady stream of income. Since, the REITs popularly invest in commercial space; therefore the return is higher than that yielded from investing in residential property. The investors also have an upside when the valuation of the underlying properties of the trust increases. This is because the price of each share of REIT is equal to the Net Asset Value (NAV) i.e. the carrying value of properties divided by the number of shares issued. Also the capital gains by virtue of trading REIT shares are exempt from tax; but the interest income is taxable under the Income Tax Act of 1961.
In the US REITs were introduced in the 1960s and today comprises 96% of the total market capitalization of Real Estate Sector. It has been two decades that REITs have been available in the financial markets of Singapore, Japan and Malaysia and they own 55%, 51% and 42% of the total market capitalization of the real estate sector.
According to a combined research report issued in 2019 by CRISIL, JLL, Anarock Capital and JP Financial, of the total capital investments in the realty sector 70% have been made in rent yielding assets. According to the estimates in the report the Indian REIT market is expected to grow between USD 22-40 million.
As per the estimate of Indian Brand Equity Foundation (IBEF) the Indian real estate market is expected to grow to a massive INR 65000 crores by fiscal year 2040. The office space requirements have grown at a rate of 27% over the past decade owing to a spurt in tertiary services like information technology, banking and finance and consulting. The office space leasing has increased at 18% on year-on-year basis over the last 2 decades accompanied with a rent escalation of 5% per year making investment in commercial real estates a lucrative opportunity.
The enactment of Real Estate Regulatory Act (RERA) in 2016 has brought more transparency and respite in home buyers; instilling a positive sentiment. There were nearly 1500 stalled residential projects in the country at the end of 2017, on the verge of bankruptcy because of huge capital outlays, and insufficient and highly volatile cash stream from early bookings. With the enactment of RERA it is the government body’s responsibility of completing the stalled project if the developer fails to deliver the house within the stipulated time and if the home buyers combined don’t have the requisite resources to complete the project.
The process of setting up an REIT is akin to setting up a mutual fund. The Sponsor is the promoter entity of the trust that registers the REIT with SEBI. He then goes on appointing the Board of Trustees who is responsible of managing the pool of resources. The management of fund can also be outsourced to an Asset Management Company (AMC). The ownership of the pool of financial resources is then broken into smaller units-called shares. The value of the shares moves along the market value of the underlying pool of properties. The rental income generated regularly is distributed to the shareholders.
In India, draft guidelines were first issued by SEBI in 2013, but were unclear about tax implications and there was a lot of uncertainty with respect to the new instrument. The annual budget of 2015 also laid down a few guidelines-centered around minimum investment requirement by investors and the minimum value of total assets in the trust. But all this did not clear the cloud of ambiguity and it took another four years for India to have its first REUT IPO in 2019. The SEBI mandated the minimum pool of assets should be INR 500 crores and to make the investments in REIT shares more inclusive the minimum investment required by an investor is reduced from INR 2 lakh to INR 50,000.
There are severe apprehensions aroused by the pandemic with many employee and service centric entities deciding not to extend their lease contracts.
But as the Microsoft CEO, Satya Nadella said that permanently working from home can be damaging for social interaction and mental health for workers. Nadella in an interview with NYT said the all-remote setup would be "replacing one dogma with another dogma”. So this pandemic can only be deemed as a temporary disruption.
India witnessed its first REIT IPO in March 2019, by Embassy Office Parks, a Bangalore real estate developer backed by Blackstone group, an international private equity firm. The issue was listed on the Bombay Stock Exchange. The return on the Embassy Office Parks shares has been 25% till April 2020-despite the Covid19 pandemic. Prior to the pandemic the REIT shares were blooming with 50% return in Q3FY19.
The most recent REIT IPO has been offered by Mindspace and has closed on 29th July 2020. It has been subscribed 38% by retail investors reflecting upon the growing investor confidence and interest in the new investment instrument.
There have been several other companies planning to launch REIT IPO’s a few of them being-Bengaluru Based-Prestige Estates, Oberoi Realty and Godrej Properties.
”
By-Shreya Ahuja
References-