REITs: Eagerly awaited by the industry but buyers prefer a ‘wait and watch’ approach

Real Estate Investment Trusts (REITs) may be one of the most debated and expected developments in the Indian real estate sector but a majority of Indians remain unsure about how it will operate.

An even greater number of people are questioning the opinion of experts, as far as claims of lucrative return on investment (ROI) are concerned. Indians believe that given the market uncertainties, REITs will not be a game-changer for Indian realty, unless the returns are really tempting. More than half, as many as 54 per cent Indians, maintain it is more of the hype around REITs, than any lucrative investment option that could compel them to invest. More than three-fourths of Indians (78 per cent), believe that REITs would not be attractive, unless the returns are in double digits.

These are the findings of a pan-India survey by Track2Realty, a real estate think tank. Track2Realty conducted the survey between September 20 and September 30, 2018, across 10 cities (Delhi, Gurugram, Mumbai, Pune, Bengaluru, Hyderabad, Chennai, Ahmedabad, Indore and Kolkata), to assess whether Indians are ready to embrace REITs. A structured set of questions that was based on the qualitative assessment of high net-worth Indians, was given to the respondents. The questions pertained to the understanding and awareness about REITs, risks versus returns, willingness to invest and their expectations for the success of REITs in India. The survey tried to ascertain whether they would invest in a new financial product.

 

Lack of awareness, unclear ROI deter investors from REITs

A substantial number of Indians (62 per cent), feel that it is too early for REITs to make inroads into the investment plans of Indians. More than half (54 per cent) believe that beyond the initial hype leading to the success of a couple of REITs, it will go through a testing phase, before it gets its due recognition as a viable investment instrument.

See also: Domestic investors still skeptical about REITs: Report

Awareness about tax exemptions in this investment avenue, also seems low, with only 42 per cent having clarity over capital gains tax, minimum alternate tax and dividend distribution tax. This was in spite of the fact that the respondents were mostly well-educated and active in the stock market.

With most investors comfortable with the absence of any entry cost for stocks, a vast majority of them (82 per cent) question why there should be an entry cost for REITs.

“The way I can invest Rs 5,000 or Rs 10,000 with a stock, the same should be the benchmark for REITs also. However, I am told that the minimum amount I can invest in REITs has to be Rs two lakhs. This makes it feasible for organised investors and not for common people like us,” rues Jyotsna Dalmia in Gurugram.

Whether REITs can offer significantly higher returns than other risk-free investment instruments, is something that 88 per cent of the respondents wondered. Consequently, they believe it would be better to wait and watch, rather than jump to a new financial product, where risk is involved and returns are not that great.

“Give me returns in the range of even 12 per cent and I am willing to opt for REITs. With all the reports about the expected ROI of seven to nine per cent, why should I be the first mover to burn my fingers? Forget stocks, I would prefer a bank fixed deposit with seven per cent interest, instead of an investment that is market-linked and hence, a risky proposition,” maintains Iqbal Qadri in Mumbai.

 

Average investors prefer a ‘wait and watch’ approach towards REITs

What is the expected time frame, for REITs to become an established investment option in India? Nearly two-thirds (66 per cent) feel it will take seven to 10 years, before REITs are recognised as trustworthy investment vehicles. “Let the financial product test the waters first and then go through the desired changes and market positioning. Once the investment instrument is settled and people are aware about its pros and cons, only then can one gauge its success in the country. I do not think there have been any sincere efforts, to educate the average Indians about why they should invest in REITs. It seems to be only for the seasoned investors,” says Prithvi Patel in Ahmedabad.

A common problem with REITs in India, is its awareness level and how it will actually work. Only 32 per cent have some clarity, over the REIT investment model. As many as 78 per cent maintain that the developers listing REITs are so confident with their organised investors that they are least bothered about creating awareness among retail investors. To create greater awareness about REITs, 64 per cent of the respondents said that the companies that opt to list REITs, should collectively create a campaign like what the Association of Mutual Funds in India did, with its campaign ‘Mutual Fund Sahi Hai’.

 

Track2Realty view on the Embassy-Blackstone REIT and future listings

• Given the hype among organised investors, who understand the dynamics of REITs and how income-generating assets could lead to wealth creation, there is no doubt that the Embassy-Blackstone REIT listing would be a success. Credit rating agency ICRA’s provisional AAA rating, has also been a shot in the arm for India’s first REIT listing.
• With this REIT listing, which is not only India’s largest REIT but Asia’s largest in terms of office portfolio area, India will join the league of global REIT markets, such as the US, the UK, Singapore, Japan, Australia and Canada.
• The long-term roadmap, nevertheless, is hazy. A collective effort, could have shaped the REIT ecosystem much better in India. Amidst the financial market uncertainties at this point of time, had the Embassy Group joined hands with other developers getting ready to list REITs, it may have provided an ideal launch pad for all the REIT aspirants. As of now, with the low awareness and many developers remaining doubtful, there will not be a sudden rush for more REIT listings, as everyone will be eager to see how the market responds to the Embassy REIT.
• Even in the global context, REITs have succeeded in an ecosystem where the ROI has been higher than safer investment instruments. For example, in the US, the average REIT yield is four per cent, versus a 10-year treasury yield of 2.4 per cent. Similarly, in Singapore it was 6.5 per cent versus 2.3 per cent and in Malaysia, it was seven per cent versus four per cent. In India’s case, the current 10-year G-Sec yields are in the 8.2 per cent range. This means that REITs should provide returns of at least 14-16 per cent, to be successful.

(The writer is CEO, Track2Realty)