REITs = Steady Stream of Cash Flow + Potential Gains
REITs offer income generation and capital appreciation both bundled in one. Hence they can be best defined as an investment that is a hybrid instrument offering a mix of both fixed income and equity or capital gain. The diversification it offers helps create a more balanced portfolio. This unique offering is what makes it a coveted asset among institutional investors, retail investors, and HNIs.
Diversification across borders
In India, REITs are still at a nascent stage and are office sector centric. The real estate sector is enormous and encapsulates various potential avenues for income generation. Take for instance data centres, warehouses, logistics and distribution centres, manufacturing units, research centres, or even parking spaces in residential areas that could be leased out for commercial purposes. With the growth of e-commerce and demand for industrial real-estate the need, potential, and opportunity of gains from such real estate properties are bound to accelerate. The advantages that REITs have to offer do not merely lie in the opportunities within a specific geography, but offers investors global exposure across nations and continents.
Why diversify globally?
The real estate sectors in developing countries are comparatively organized, unlike the historically unorganized Indian real estate segment which is now witnessing an overhaul with the advent of technology and government initiatives or reforms. On the other hand, in comparison to developed countries, developing nations have the potential of evidently stronger growth owing to their steady economic growth and burgeoning demand for commercial, logistics, and office infrastructure.
The growth of the eCommerce segment is another parameter that aids the growth of real estate in a country. As per Euromonitor International’s data, Asia’s market size grew 1.5 times in 5 years and has a market share of 47% in global e-commerce with the potential to grow much stronger by 2024. The impact of e-commerce in real estate can be seen in an increase in warehousing facilities, emerging data centres, thriving co-working spaces, and expansion of businesses beyond urban areas to include rural segments.
Yardstick to gauge
An important yardstick that investors should consider before investing in a REIT, is its Dividend Per Unit(DPU) performance over the past years. This parameter displays the financial condition and cash flow of the instrument, giving you an overview of the past performance and capabilities of the fund manager to deliver consistent results. The proof of consistent dividend results even during the Covid-19 period could be considered a parameter that defines the level of the soundness of the investment.
In investments, volatility is a given and so it is while investing in REITs as well. Investors could face volatility in 3 ways:
- Fluctuation in dividend yields
- Fluctuation in NAVs
- Appreciation and depreciation of currency (Only for International Investments)
As for Indian investors investing in global REITs, the depreciation of the Rupee could be a boon. The Rupee is likely to depreciate over the next 3 years, thus offering global REIT investors the benefit of currency devaluation and alternatively diversifies the investor’s portfolio to hedge against domestic market volatility.
Should you invest in REITs?
The investment attitude of Indians seems to be changing over time. Once, where investor portfolios were largely skewed towards fixed income and physical assets, today the changing trend of millennial investors is opening opportunities for investments across asset classes. This trend could be attributed to rising financial awareness and the understanding of an absolute need for diversification across asset classes. REITs are likely to be an attractive investment vehicle for investors in the coming years. Although, in our opinion, Indian REITs do need to expand their universe from mere office space to other commercial opportunities in real estate, ones that trusts across the globe are resourcefully investing in.