Recently, our regulator SEBI recently reduced the trading lot of REITs in India from 200 units to just 1 unit. This move has suddenly improved the liquidity for REITs and is also expected to increase small investor participation in the REIT space.
Here are some thoughts about REITs in India and should you invest in REITs in India or not:
- What is REIT? It is an acronym that stands for Real Estate Investment Trust. It is like a mutual fund that invests in a portfolio of real estate assets to generate regular rental income and capital appreciation.
- Like equity mutual funds invest in stocks and debt funds invest in bonds, REITs invest in physical real estate.
- These can invest in different kinds of rental-generating properties like office spaces, residences, flats, malls, warehouses, etc. As per SEBI’s guidelines, REITs need to mandatorily distribute 90% of their income to REIT unit-holders. These are listed on stock exchanges and can be traded like regular stocks and ETFs.
- REITs primarily (minimum 80%) invest in finished and rented out commercial properties. So this removes the risk of investing in under-construction properties. Do read Under-Construction Vs Ready-to-Move Properties.
- And SEBI requires REITs to distribute not less than 90% of the cash flows that they receive every year to their unit-holders (once every six months)
- What is unique about REITs is that unlike your regular property investments, which require large upfront (or funded via home loans) capital investments, you can here buy into a diversified portfolio of different rental properties with small amounts. And for most small investors, their major real estate investment is in their residential house/flat. Through REITs, you can get exposure to different commercial real estate across geographies. That too with a small investment (post reduction in trading lot size by SEBI in 2021).
- So even though you may not be able to afford a property, but you can still afford to invest in a REIT with just a few thousand.
- In a way, it’s a mode to fractionally own real estate that allows small investors to invest in commercial realty that is mostly unavailable and unaffordable to them. Also read, about fractional ownership of real estate in India.
- The one obvious risk for rental-dependent REITs is that their properties can go vacant and rents can dry up. An economic downturn can affect the demand for commercial real estate very badly. Oversupply of commercial real estate square footage in nearby areas too can impact the rent of REIT assets negatively.
- Structurally, REITs are hybrid instruments with characteristics of both debt and equity. It is debt (bond) Debt because it is mandatory for REITs to distribute 90% of their net distributable income. It is equity because it is listed on exchanges and can be traded like stock and its price may also depend on demand-supply, market’s perception, etc.
- How to select the best REIT? If you are looking at REITs, then you first need to look at promoter/sponsor. The higher their quality and pedigree, the better it is. Secondly, you need to look for REITs that have high-quality deep-pocketed tenants (like blue-chip and multinational companies) in properties located in prime and high-demand areas. A high occupancy rate across the REIT properties is also a big plus. Also, look for property portfolio concentration. You may not want to go for a REIT that has the bulk of money parked in single property or rents coming from just one large tenant.
- What returns to expect from REITs? These are less of equity and more of a debt product. So for all practical purposes, your return expectation should be similar to what you will get from debt-oriented products. It’s a kind of income-generating debt investment that can additionally generate capital gains if you get your exit right.
- Should you invest in REITs? It is best to treat it as an alternative asset class (and not a core one as equity, debt, etc.) that one can consider for small exposure.
- When compared to investing directly in real estate, there are plenty of benefits if you go with REITs like asset high-quality property exposure, investments in commercial real estate, property and geographical diversification within real estate, high-quality tenancies with long rental leases, professionally managed properties, higher liquidity, etc. So for few small investors, REITs can replace physical real estate in an investment portfolio.
- Remember that investing in physical real estate also requires a large amount to invest, which may not be possible for most small investors. Then there are other issues like being able to find the right property among other hard things. (Read Reality of Indian realty) But if you already have some non-residential real estate in your portfolio, then you need to think carefully about whether it makes sense for you to invest in REIT or not.
If you ask about the Listed REITs in India (2022), then the answer is that India has only 3 listed REITs as of now. So the choice is limited. These are Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India REIT. So that is the List of REITs Companies in India or REITs in India stock market as of now. But I am sure that with the recent reduction in REIT trading lot size and growth prospects in commercial real estate, there will soon be tons of upcoming REITs in India.
Like REITs, there are InvITs as well. InvIT stands for Infrastructure Investment Trust. While REITs invest in completed income-generating properties (minimum 80%) and under-construction real estate projects, InvITs, invest in infrastructure projects pertaining to roads, power plants, highways, etc. That is the basic difference between REIT Vs InvIT in India (2022). Here are the details (link) of REITs and InvITs (as of March 31, 2021) on SEBI’s website.
In India, REITs are just learning how to walk. The runway is huge for them if you compare it with the developed markets where REITs make up a significant percentage of real estate market capitalization. It’s possible that REITs may change the nature of real estate investments in times to come by bringing in more and more small retail investors and provide them with easy exposure to high-quality rent-yielding properties that were previously unaffordable for them.
So that was about REITs in India 2022. Think about it carefully before deciding whether to invest in REITs or not.