What makes REITs in India a preferred choice for investors?

At a time when there are so many question marks over office space portfolios following the Coronavirus pandemic, which has forced companies to opt for the work-from-home (WFH) model, the success and investors’ appetite for Real Estate Investment Trusts (REITs) that operate primarily in the office space segment in India, settles many apprehensions. It is generally believed that the office space segment would be the last to recover, post the Coronavirus slowdown. Why are REITs such a big success then? The fact is that for retail investors today, the stock market is a preferred choice and the safest among stock options are REITs. HNIs, pension funds, sovereign funds and institutional investors, are latching onto REITs, seeking yields, conscious of the fact that the long-term growth of office spaces remains intact.

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REITs in India: Quick facts

Mindspace REIT was oversubscribed 12.96 times during the most gloomy office space outlook, in June 2020.

The two listed REITs in India, Embassy and Mindspace, are trading at about 10%-20% premium to their listing prices. This is over and above the periodic interest payments, yielding 6%-7.5%, post tax returns.

REITs have also acted as a catalyst, in the changing financing structure of Indian developers. From unorganised funding structures, REITs have been witness to structured finance, where global private equity players, mutual funds and insurance companies have shown interest, leading to its success.

How do REITs work and what are its advantages?

Since REITs own, operate, or finance income-generating office space portfolios in India, they pool capital from investors and thus, make it possible to earn dividends from real estate investments, without having to buy or manage the properties themselves.

See also: Crowdfunding versus REIT: Crucial differences

Admitting that the demand for office space will take a little longer as WFH is here to stay for some time, JC Sharma, VC and MD of Sobha Limited, believes that several commercial spaces have been running empty since the COVID-19 lockdown. People are waiting to see how the scenario pans out. REIT is nevertheless a good investment option, as it can be traded in the stock exchange after its listing, he says. “In the long run, REIT may offer better post-tax yields, as compared to fixed income. This makes it an attractive investment option in the long run, due to its steady and growing dividend stream, along with capital appreciation of the underlying asset. It is generally believed that the real estate sector will attract a larger investor base in 2021,” maintains Sharma.

Apurva Gupta, chief marketing officer, Rivali Park, CCI Projects, points out that although the global crisis could affect office REITs in the short to medium term, the long-term outlook still appears to be positive. Investors should consider taking a long-standing view on office REITs. There is going to be more immediate pressure on operations and costs for companies but eventually, the impact on office REITs will be momentary and manageable. “The dividends distribution might not be the same as before, because considering the current challenges and costs in the near-term, it is possible that REITs may postpone portions of their distributions, to a later date. They can provide options for unit-holders, to partake in a distribution reinvestment plan, to preserve cash in the near term,” says Gupta.

Why REITs are a viable investment alternative?

Real estate and stock markets have emerged as preferred investment options for the Indians, post-COVID-19.
Quality realty stocks were among the first to witness green shoots, after the historic stock market crash in March 2020.
REITs, with its higher dividend in addition to the stock price appreciation, is seen as a safer bet than realty stocks.
Since its inception REITs have outperformed the BSE Realty Index in India.
Since its listing on April 1, 2019, Embassy Office Park REIT has given 14% returns as against -20% by the BSE Realty Index (Data till June 25, 2020).
REITs on bourses are trading at above 10%-plus premium to the initial listing price.
Debt money market mutual funds are yielding about 6% pre-tax in one year returns, as per Value Research data.

See also: All about tax on commercial property

How REITs can help investors and the real estate sector

In a nutshell, a new product in the market with more safety around it, added with higher ROI, REIT has thus far been a success story in India. Analysts believe that REITs have the potential to lend better security, thereby, organising the real estate sector even more. Since REITs only own or capitalise on properties that are profitable, the concept can be a great boon to real estate investors. The trust will enable investors to get capital appreciation and income from the property, without having to purchase and maintain it.

In its infancy in India, REITs have opened real estate to a broader spectrum of investors. REITs benefit the developers as well, because when REITs buy more properties, developers stand a better chance to sell more units. During unanticipated scenarios like the current pandemic, the sector tends to get impacted, thus, reducing the number of investments. In such a scenario, REITs can insulate the real estate market from risks, attracting more investments, regardless of the economic conditions.

Last but not the least, REITs have encouraged foreign investment in the realty sector from NRIs, without them requiring to visit the property to invest. As of now REITs are prevalent only in the commercial space. People are still getting familiar with how REITs function and observing how it will expand within the commercial space. As the investor base increases, it is likely that the Indian market may be able to see REITs being introduced in the residential sector, as well.

FAQ

Are there any REITs in India?

Embassy Office Park and Mindspace are the two REITs in India.

Which was India’s first REIT?

Embassy Office Park was the first REIT in India, which was listed in April 2019.

How to invest in REITs?

Investing in REITs is akin to investing in listed shares through a DEMAT account.

(The writer is CEO, Track2Realty)

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Ravi Sinha

Ravi Sinha is a journalist with nearly two decades of cross-discipline media exposure. He is the CEO of real estate think-tank group Track2Realty. He has been writing extensively on the real estate sector for nearly a decade. Evaluation of real estate brand performance is his expertise and he has immense insight into consumers’ psychograph in the property market.

Twitter: https://twitter.com/ravitrack2media