While Real Estate Investment Trusts (REITs) are considered a relatively new investment vehicle in India, the structure has been a standard part of many investors' personal portfolios worldwide for many years.
Historically, REIT portfolios have been one of the best-performing asset classes available and should be a core component in any long-term, diversified investment portfolio. REITs, a $2trn asset class, have been a huge success globally, providing institutional and retail investors with an opportunity to benefit from the growth in real estate across multiple sectors and geographies. In the US alone, 145 million individuals have invested in REITs through their retirement savings and other investment funds; equity REITs have outperformed the S&P 500 in the 20-, 25- and 30-year periods.
STRONG LONG-TERM FUNDAMENTALS OF THE INDIAN OFFICE MARKET
The REIT structure has permanently transformed the Indian office market since the listing of India’s first REIT, Embassy REIT, in April 2019, and subsequent listings of Mindspace Office Parks and, more recently, the Brookfield Office Parks REIT.
The long-term fundamentals of India’s office market are solid. Global companies are looking for flexible, productive and dynamic workspaces that provide a complete business ecosystem for the young tech talent available in India and in short supply worldwide. The Nasscom industries in India employ over 4.5m people, housed in high-quality office premises across the major metros of India. Those businesses are growing every year and have record hiring plans and record order books coming out of last year's pandemic as the business world embraces digital transformation.
These occupiers are not only about the older style ITES companies but increasingly are dominated by Global Captive Centres and Captive R&D Centres of international companies. Today there are over 1500 such Global Captive Centres, and expectations from industry leaders anticipate continued growth over the coming 3-5 years.
These technology industries have been driving the growth of India's commercial real estate industry over the past decade. For India to have listed three REITs with a combined market cap of $7.6 bn or INR 55,267 crores in the last two years speaks of how eager investors have been to embrace the evolution and growth story of the office market in India, away from the fragmented, low scale, variable quality market to a more institutionalized, higher quality compliant market that provides a better product to occupiers and investors alike.
ACCESSIBILITY TO RETAIL INVESTORS
Commercial Real Estate has remained inaccessible primarily to retail investors due to high-ticket prices, illiquid long-term investments, and difficulties in administering and managing significant assets. Now retail investors can build wealth through commercial real estate, through the REIT product, in a liquid, tradable unit with tax efficiency and high-quality management.
REITs invest primarily in completed buildings, income yielding real estate assets. These typically yield the highest returns on an exit timeline of 7-10 years, making it a long-term investment much like private equity or mutual funds. REIT investments are tradeable market instruments, and therefore transacting is significantly less cumbersome than directly investing in property. The REIT assets are secured by long term leases with multinational and Fortune 500 companies, ensuring stringent terms of lease with occupiers and a steady, predictable income flow.
DIVERSIFICATION AND TOTAL RETURNS
In addition to providing retail investors with an opportunity to invest in Grade A commercial real estate by offering stable returns as quarterly distributions, REITs also provide the potential of long-term capital appreciation to retail investors. Since REITs are required to distribute at least 90 percent of earnings to investors, it makes an excellent choice for those who need an income or wants to reinvest their dividends and let their gains compound over time. REITs provide greater diversification, potentially higher total returns and lower overall risk. The REIT assets are professionally managed with a compulsory minimum allocation of 80 percent to completed, income-generating assets, and disbursement of regular income to unitholders, which make REITs an attractive option for the Indian investor.
A further benefit is that REITs are particularly tax-efficient for the private investor; rental income received by the REIT, which are in turn distributed to unitholders, are treated as a pass-through flow and not subject to income tax.
BEST IN CLASS GOVERNANCE AND TRANSPARENCY
Global and domestic investors have increasingly accepted that the REIT structure in India possesses best-in-class governance and compliance standards. The way SEBI has structured REITs in India has made the asset a reliable investment for investors by maximizing security and focusing on investor returns. SEBI has implemented effective governance, stringent reporting, regulatory framework and disclosure practices ensuring greater transparency.
SEBI has implemented effective governance and safeguards such as disclosure requirements, professionally managed real estate assets, a compulsory minimum investment of 80 percent in income-generating assets, and compulsory disbursement income to unitholders, making REITs a secure and attractive option for the Indian investor.
REITs provide diversification, transparency, stable cash flow through distributions and capital appreciation, having the ability to build wealth with minimum downside risk over a long-term horizon. Not only have REITs continued to perform under normal circumstances, but they have also demonstrated resilience during the pandemic in India. For example, Embassy REIT delivered a total return of 24 percent since listing and has paid out more than INR 3700 Crores in distributions to its unitholders over the eight quarters since April 2019.
REITs have the ability to withstand periods of high inflation and volatility in equity, high-interest rates and low bond dividend yields; and have grown from multiple levers – contractual escalation, mark to market, on-campus development and acquisitions. With this track record, an office REIT focussed on the Indian market should form a core component of any asset allocation strategy alongside equity and bonds for all retail investors.
INVEST IN COMMERCIAL REAL ESTATE THROUGH LIQUID TRADABLE UNITS:
Worldwide, REITs are a preferred mode of investment for retail investors as they offer security combined with high yield and growth through indirect and regulated ownership of Grade A real estate assets. The real estate sector has always been viewed favourably by Indian investors. However, traditional forms of investment in this sector had three significant shortcomings – high quantum of initial investment, low liquidity and challenges around long term asset management. This meant that many investors could not invest in Grade
A commercial assets
REITs now allow Indian investors to participate in the benefits of the commercial real estate sector, which were hitherto unavailable to a large section of the Indian society. Like stocks, investors can buy and sell REIT units in the market, allowing high volume trades and creation of liquidity on disposal instead of direct investment that were opaque on fees, low on governance and illiquid.
DIVERSIFICATION and TOTAL RETURNS
REITs provide greater diversification, potentially higher total returns, and lower overall risk. The ability to generate dividend income along with capital appreciation makes a REIT an excellent instrument to offset equity and fixed income volatility. There is also evidence that shows REITs have outperformed listed realty stocks due to consistent dividend distribution, making them an attractive investment worldwide. With this track record, an office REIT focussed on catering to the Indian market should form a core component of any asset allocation strategy alongside equity and bonds for all retail investors.
The author, Michael Holland, is CEO at Embassy REIT. The views expressed are personal
First Published: IST