Residential real estate has been doing very well. But one asset class that one doesn’t talk about so often in the real estate space is Real Estate Investment Trusts (REITs).
It is a company that owns and operates income producing real estate, and owns many types of commercial properties or real estate offices. Simply put, it resembles mutual fund with real estate as the underlying assets. They invest money in completed and revenue generating assets and developmental properties, mortgage backed securities, corporate debt of real estate sector.
So how one can invest here?
REIT operates via an SPV or special purpose vehicle and the trust receives dividends and interest from the SPV. REITs also earn rent and capital appreciation, which is then distributed via dividends to the unit holders.
One way to invest in REITs is via listed players. So, there are three in India. Brookfield REIT, Mindspace REIT, and Embassy REIT.
What are the underlying fundamentals?
REIT expects to reach pre COVID occupancies of 90 percent by March to June of 2023 and rental collections have been at 99 percent over FY21 to quarter one of FY23.
Companies are also seeing healthy re-leasing spreads, but contractual escalations despite COVID. However, fundraising via REIT has not been very encouraging. In India, FY21 saw an influx of around Rs 14,300 crore, which compares with nil amount in FY20. It dropped down to Rs 950 crore in FY22 and so far in FY23 till August, it has not seen any fundraise why REITs.
The data points - while listed REITs have higher distribution yield between 5.5 percent and 6 percent, general wanted to highlight that rental yields in the country are not very high. It is low as per the data by 99 acres, 2.4 percent for Mumbai, 3.5 percent For Bengaluru, Ahmedabad has it around 3.2 percent and it is low for other cities as well, which compares with Asian countries rental yield of around 3.5-4 percent and European countries with a rental yield of 4.5-5 percent.
“REITs have the opportunity to make new acquisitions, they are tax efficient, and from an institutional or retail investor’s perspective, whenever they invest in a REIT, they are obligated to distribute majority of the dividends. So whatever is being earned from the portfolio is being distributed out,” said Gaurav Kumar, MD, Capital Markets and Residential Business, CBRE India.
REITs is for a separate category of institutional investors. It's for listed investors who like the liquidity, he added.
According to Kumar, it's a different platform for investing in commercial real estate.
Vinod Rohira, CEO at Mindspace Business Park REIT said, “It must be clear that when REITs are distributing dividends, you are not paying any tax on that dividend. So your effective return is far greater.”
“When you're looking at a REIT, you're looking not just at dividend distribution, you're also looking at the intrinsic value of asset and at the same time that's where your total return comes up,” he added.
For the entire discussion, watch the accompanying video