With 2020 in hindsight, the need to generate multiple mediums of passive income is being felt even more so today. Besides the traditional mediums of fixed deposits and debt instruments that offer fixed returns, real-estate has been the only other choice. Owning and gaining from leasing and renting out real-estate properties like commercial or residential real estate is a dream for most investors. But, properties that offer higher returns come at a steep cost that is either unaffordable or unattainable. REITs as an investment concept has been the solution to unattainable real estate properties for investors.
REIT – an acronym for Real Estate Investment Trust, was an investment vehicle created in the 1960s in the US offering investors the opportunity to invest and gain from income-generating real estate. REITs allow investors to own or finance high-value real estate projects, similar to stock holding options where investors hold or own stocks of an organization thus financing its activity and partaking in its profits.
As an organization, REITs are modeled after mutual funds. Similar to Mutual Funds, where there is an asset manager who manages the investment, while investors pool in money to invest in the fund; in a similar way REITs either own, operate or finance real estate properties and mortgages while investors receive returns in the form of dividends and the opportunity to invest in appreciating real-estate assets which they otherwise would not have access too.
- Investments in Grade A assets in prime locations across cities
- Wider diversification with smaller investments
- Limited need for research needed by the investor
- Freely transferrable securities listed on stocks exchange
- Investments are managed by professionals/experts with no entry or exit load
- Reduced burden of the registration process as compared to investing in real estate outright
- Dividends are exempt from taxation
REITs account for nearly 50% of the real estate industry’s capitalization in countries like Singapore and Japan and approximately 96% respectively in the US. The real estate ecosystem additionally benefits with a boost in finances which is much-needed liquidity to propel projects and sales.
In India, we currently have three REITs floating in the markets. The first, Embassy REIT was launched in March 2019. The issue was oversubscribed and logged returns to an approximate tune of 21% in a matter of 6 months. The second is Mindspace REIT which has projected distribution yields of 7%, 7.5% & 8% for FYs 2021, 2022 & 2023 respectively. Then we have Kotak International REIT FOF, recently closed its NFO on 21st December 2020, India’s first international REIT fund.
REITs as an investment product are regulated by SEBI. Regulatory body SEBI’s provisions help safeguard investor’s interests. This is done through the imposed restrictions on these trusts:
- 80% of the investments must be invested in ready commercial real estate, only up to 20% can be towards under-construction assets
- 90% of the trusts’ net distributable income must be disbursed to investors as a dividend
- To stimulate growth a trust can leverage debt up to 49% of the value of its REITs assets
- Leverage that exceeds 25% of the asset value requires credit ratings and majority stakeholder approval
Historically, developed countries like the US have been investing in REITs for over 5.5 decades giving us a strong track record to view. In India, REITs are still at a nascent stage where exposure is largely skewed towards investments in office spaces in the commercial real estate sector. This is unlike REIT investments across the globe.