What If there was a way to invest in property just like shares? Well, A new investment opportunity is now available for investors, dubbed the Real Estate Investment Trust (REIT). This, technically now opens the champagne bottle for everyone who wanted to invest in real estate, but couldn’t because of high entry barriers. The Finance Minister had announced in the 2014-2015 financial budget speech that some tax incentives would be provided for investors investing in REITs and other Infrastructure Investment Trusts (InvITs). With SEBI's approval, product manufacturers have been given the go ahead to launch products with a minimum investment of Rs. 2 lakhs in high end real estate properties.
What is it?
- REITs is a special investment company, much like mutual funds, that invests money obtained from investors directly in real estate, either through properties or via mortgages.
- These are basically companies that buy and manage rent-producing assets such as offices and retail outlets. The raise money from issuing ‘units’, each worth ₹1 lakh, which are listed and publicly traded. You can invest in a minimum of two units. The REIT distributes the rental income earned, after expenses, as dividends. At least 90 per cent of the profits have to be distributed, giving a regular income for investors. Professional managers will handle operational issues such as building maintenance and managing tenants.
- REITs have been in existence for as long as two decades in countries such as the US, the UK and Singapore. But Indian REITs – just like ‘aloo tikki burgers’ and ‘tandoori paneer pizzas’ — have been re-crafted to be more palatable to Indian investors. Sample this: globally REITs don’t use any leverage, but SEBI has allowed local REITs to take recourse to borrowings and deferred payments for up to 50 per cent of their assets
Why is it Important?
- REITs are exciting for developers and private equity (PE) funds that have invested in commercial properties. Why so? Developers are already holding commercial properties worth ₹60,000 crore, which can now be sold to raise cash. Further, REIT enables you to invest indirectly in large properties which you would not have been able to buy with your own resources. REITs also let you get exposure to property investment with a smaller outlay, compared to buying property directly. Also, usually, most of us buy property for capital appreciation. REITs give you an option to invest in property for regular income as commercial properties typically pay back rental returns of around 7-10 per cent.
- There is also a likely price appreciation of around 3-5 per cent a year. So the pre-tax return you may get can be around 10-15 per cent, say property players. Terribly unexciting, you say? But consider two positives. One, REITs offer a way to diversify your investment into more asset classes besides equity and debt. Second, as the economy improves, rents can go up and occupancy can improve — boosting returns.
What’s in it for me?
- If you are home buyer, the advent of REITs can be good news as it will offer the developer more options to raise money and complete his pending projects. New projects can also be launched with the funds raised — lifting the property market.
- If you are a safe player, REITs — with their diversified portfolio — will fit your bill better than land or mega-projects. Do read the disclosures in the REIT offer document. This will help you evaluate the rental potential of the properties by looking at the lease period, size and quality of tenant. Also familiarise yourself with valuation metrics that relate to REITs. Anyway, SEBI is putting rules in place to make sure you can’t be gamed.
The bottom line
REITs are likely to bring in transparency and accountability in the real estate sector. But only on paper, it remains to be seen what the 'on ground' effects are. The net asset value of REIT units will be declared at least twice a year. This will ensure transparency.
So if you want to get exposure in Real estate without taking too much risk, REITs are exactly for you!