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Real estate boom: Should you invest in REITs?

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Murtuza Arsiwalla, Director, Kotak Institutional Equities is of the view that REITs is an asset class that falls between pure debt and equity both in terms of the risk and return profiles. He sees the real estate getting in good shape, going forward.

With the demand in real estate picking up, the sector could be turning a corner. In such an environment, would investing in Real Estate Investment Trusts (REITs) be a good bet, or should one still stick with good old real estate stocks. To discuss this theme in detail, CNBC-TV18 spoke with Murtuza Arsiwalla, Director, Kotak Institutional Equities, and Sharad Agrawal, Executive Director, Knight Frank India.
Arsiwalla is of the view that all conditions are favourable for the real estate space ― interest rates now are at historical lows, and affordability for the sector is as good as it can get. Demand numbers for a few quarters have been good, and so one can be optimistic that this is the start of a big new cycle for the space, he added.
Over the last decade or so the trend has been modest, and so one would like to believe that the sector has turned the corner, he said.
In India, REITs primarily cater to the office/ commercial space. So, when asked about his view on that particular space, Agrawal said in the commercial market, the long-term view on India is on the uptrend; this is based on the increasing pace of vaccination, as companies and employees are returning to office. "The robust pace of hiring that we have seen over the last 18 months ― even though most of them have not come to office ― we feel that should translate into a stronger 2022 for the office market," he said.
According to him, Q3 this calendar year was one of the strongest quarters, with 12.5 million square feet of office space transacted, which is 168 percent YoY growth over last year, and more than 80 percent in 2019, which was an exceptional year for office leasing.
On the REIT structure
Arsiwalla said it is an asset class on its own ― it's somewhere between pure debt and equity. What gives it debt-like characteristics is the fact that it provides a more predictable and frequent cash flow, which comes in the form of distributions, while the equity flavour comes from the fact that these distributions are not fixed, unlike traditional debt instruments. Moreover, it is a growing distribution, and that growth element gives it the equity flavour.
“Therefore, it is an asset class, which is in between the two, both in terms of the risk and return profiles,” said Arsiwalla.
The formula for income distribution
The Securities and Exchange Board of India (SEBII) has mandated that at least 80 percent of a REIT's portfolio should be invested in completed and income-generating properties, and only 20 percent can be under construction or other types of properties. So, that reduces the execution risks for lay investors. SEBI also mandates that REITs must distribute at least 90 percent of the cash flow that they receive every year to the unitholders; and this has to be done at least every six months. Some REITs have chosen to do it on a quarterly basis, said Agrawal.
So, this is investor-friendly and is designed more for people who are looking for regular income versus those seeking equity-like exposure, he added.
Does the office market look compelling now?
Arsiwalla said this can be broken into two parts ― short term, and one with a five-year horizon.
He said in the short term, occupancies have dropped and rentals softened on the margin end. However, the softening has bottomed out in the last quarter. From a long-term perspective, the structural story of India being a destination of quality, and office space at a highly competitive price remains true, said Arsiwalla.
He said, “If I were to draw parallels with the global financial crisis ― although they are not perfect comparisons, essentially a world that became more cost-conscious ― a lot more of work moved into the Indian commercial office space. And that, to my mind, saw the big boom post the global financial crisis. This time can be no different. It is early to tell, given physical occupancy in offices is still low, and therefore, the reasons to sign incremental leasing space for all of the additional headcounts that you have added, especially in the technology sector, needs to be seen. But that is where the next leg of positive news will come from, where people start moving back to offices, corporations have asked to revisit the leasing arrangements, and post which you start seeing occupancies and rentals, sort of, come through.”
Along the way, one will get a sense of the exact quantified impact of 'work from home'. However, there is greater acceptance that it's going to be a more hybrid model, as compared to just 'work from home', said Arsiwalla.
For the entire discussion, watch the video
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