A REIT is an organization that gathers resources from investors and then collectively invests them in real estate.
Commercial real estate as an asset class has been out of reach for the average Indian investor.
Be honest. Many of us aspire to own commercial properties in the most prestigious locales and rent them out.
Real Estate Investment Trusts or REITs has made this fantasy a reality for many investors.
A REIT is an organization that gathers resources from many different investors and then collectively invests them in real estate to earn appreciation and dividends.
This investment vehicle buys, sells and manages real estate assets on behalf of investors.
REITs allow you to invest smaller savings in real estate that would otherwise not be possible.
All of this is done comfortably and conveniently without you ever getting involved in the long-term property ownership process.
Simply put, REITs are real estate where mutual funds are stock markets. They are publicly traded just like common shares on stock exchanges.
The first REIT in India was listed in April 2019. So why are we talking about REITs now, after almost three years?
Well, in the current market landscape when inflation in the US is at a 40-year high (the stock market doesn’t like high inflation), REITs have emerged as a new investment avenue.
It is increasingly difficult for investors to find high yielding assets to invest in. That’s where REITs come in. They can prove inflationary for your portfolio.
Many call this the investment theme for 2022 and rightly so.
Understand why professionals are learning about REITs…
• Stable payments
In recent years inflation has been contained. But now, inflation is back to big time. So you need a fence.
While we have gold and other investment options in an environment of rising inflation, here’s how investing in REITs helps beat inflation.
Property prices and rental income tend to increase when inflation increases. In fact, someone who has purchased a property using a fixed-rate loan can benefit during periods of high inflation. This supports REITs’ dividend growth and provide a reliable income stream even during periods of inflation.
REITs are required to distribute to unit owners not less than 90% of the net distributable cash flows in each fiscal year. This makes them very attractive to anyone looking for a regular income.
So the REIT has a check mark on the steady payout.
• Diversify investment portfolio
When high-risk assets like stocks perform well, a low-risk asset like gold usually won’t. When stocks fall, gold is generally stable or rising.
In the same way, real estate is largely driven by a set of factors that are almost entirely different from those that drive stock prices.
That’s why you need REITs in your portfolio. It offers the advantage of diversifying your portfolio and entering the real estate market. It’s also uncomplicated and with a minimal investment.
Budget 2022 has laid the groundwork for a massive investment boom. The focus is clearly shifting to growth at the expense of inflation.
REITs will help you make money when your investment capital explodes.
In addition, the demand for real estate is also increasing. A survey shows that around 75% of the rich will look to buy luxury properties, worth more than Rs 50 million, within the next two years in major cities as well as resort destinations.
That’s for the rich. But what about affordable housing?
Well, the growth in affordable housing over the next few years is likely to be strong as around 22% of the population is still unsettled.
With the situation gradually improving, the sentiment towards the real estate sector has changed.
By diversifying their portfolios, REITs can take advantage of the real estate boom.
• Reopening the economy is good for REITs
Initially, REITs became very popular because of the dividend yield they offered.
However, since the pandemic hit, REITs listed on Indian exchanges have started to underperform Sensex widely. This is due to the growing popularity of work from home. There is uncertainty about the future demand for office space.
But now, companies have called their employees back to the office and normalcy is returning. This bodes well for REITs and makes them an attractive asset class to invest in.
Overview of REITs listed in India
In India, there are currently three listed REITs – REIT Embassy Office Park, Mindspace Business Park REIT and Brookfield India Estate Fund REIT.
Let’s take a look at each…
No. 1 Park Embassy REIT . Office
Embassy REIT is India’s first publicly listed REIT.
It owns eight high-quality office parks and four main downtown office buildings with 33.6 million square feet (MSF) of completed leased space.
It also has a 9 MSF pipeline under construction and development.
In addition to the offices, it also owns two hotels in operation with 477 keys, a hotel under construction with 619 keys and a 100 MW solar park.
The company is backed by the Blackstone Group, which has been actively investing in the Indian real estate market since 2010.
For the quarter ending December 2021, Ambassador REIT announced a payment of Rs 4.9 billion or Rs 5.20 per unit. For fiscal year 2022, Ambassador REIT has now announced a year-to-date cumulative distribution (YTD) of Rs 15.6 billion or Rs 16.50 per unit. For fiscal year 2021, the company announced a cumulative distribution of Rs 21.48 per unit out of a total of Rs 18.4 billion.
The quarter is being evaluated as a good quarter for Ambassador REIT as rental revenue reached more than 99%, similar to last year.
The IPO price of the REIT is Rs 300. Since its listing in early April 2019, the stock has risen 24% to Rs 388 as of late Monday.
For 2022, the company has enhanced its guidance and will claim Rs 21.70 per unit although the Omicron wave affects some segments slightly.
This will result in a dividend yield of 5.7% above the current price.
Another important metric that investors need to consider is the book value of the REIT. Just like mutual funds publish their net asset value (NAV) daily, REITs publish their NAV semiannually or annually.
So it is important to check if the REIT is trading at a discount or above its book value.
Ambassador REIT is currently trading at a 2% discount from its book value of Rs 388.26 as of March 2021.
#2 Mindspace Business Park REIT
Mindspace REIT is the second REIT to be listed on Indian exchanges. It is managed by K Raheja Corp Investment Managers.
In the most recent quarter, Mindspace Business Parks REIT leased more than 1.8 square meters of office space, bringing the total leasable area to nearly 4 square meters in the first nine months of the fiscal year.
It claims distribution of Rs 2.8 billion or Rs 4.64 per unit for the December quarter of 2021 with most tax-free. For the September quarter of 2021, the company announced a distribution of Rs 2.7 billion or Rs 4.60 per unit.
For fiscal year 2021, the cumulative distribution to unit holders is 9.59 per unit.
Mindspace’s IPO offering price is Rs 275/unit. It is up 19% since listing in early August 2020. Its units are currently trading at Rs 358.
Mindspace REIT offers a dividend yield of 5.2% while the company is currently trading at 4% above its book value of Rs 345.2 as of March 2021.
#3 Brookfield India REIT
The last to join the party was Brookfield India REIT.
Brookfield India Real Estate Trust REIT is a commercial real estate company based in India. The investment trust’s portfolio includes office parks on campus. Its commercial properties are located in Mumbai, Gurgaon, Noida and Kolkata.
For the quarter ending December 2021, Brookfield REIT announced a dividend of Rs 5 per unit for seniors thanks to strong rental momentum. It leased 5.36 lakh square feet of office space across its entire property with additional expansion options of 2.91 lakh square feet during the quarter.
The recent payment has a cumulative dividend distribution for fiscal year 2022 of Rs 17/unit.
Units are offered for sale at Rs 275 per share. Currently, they trade at Rs 311.
Out of the three, Brookfield REIT has the highest dividend yield at 6.5% and also the highest occupancy rate.
It is currently trading at a 3% discount from its book value of Rs 317 in March 2021.
As can be seen, the listed REITs are offering good dividends through quarterly distributions, accumulating up to more than 6% at current prices.
An important point to note here is that the 3 REITs listed in India all have Grade A office space and boast quality properties, leased to the best companies in the world. That’s why even during the pandemic, their collection is still around 99%.
According to Anarock, a leading real estate services company, rental activity has been growing rapidly and is seeing growth. All three REITs that released their results for the quarter showed a positive trend.
In short, it’s…
Sure, now you’ll be excited to take a close look at your REIT and diversify your portfolio. But there are a few things to remember before you invest.
The primary motive of REITs is to generate income, not capital gains. REITs are to provide a stream of income in the form of rent/interest and leave some scope for capital appreciation.
So if you are investing in REITs, you need to understand their ability to generate income over a certain period of time. You will have to check the stability of the cash flow.
For example, if the REIT does not see optimal capacity utilization post-pandemic or loses its ability to negotiate with customers, it will earn a lower distributable surplus.
Now to an important point: Taxes on dividend payments declared by REITs.
Dividends earned from a REIT are included in your gross taxable income and are taxed according to the table that applies to you.
But that’s not always the case.
For example, Mindspace REIT distributes over 90% of payments as tax-free dividends. The two remaining agencies – the Embassy and Brookfield are still continuing to improve these measures. Brookfield’s latest payout of Rs 5 per unit is considered only 34% of this as tax free.
To conclude, REITs are catching on to the big time that is proving to be good for the real estate sector.
The performance of listed REIT opened the door wide open for real estate companies to launch their REITs. In the future, we could see more REITs launching in India.
Developers such as Oberoi Realty, DLF, Prestige Estates and Phoenix Mills, who own large commercial real estate properties, can offer their REITs.
As we discussed above, the three REITs listed in India deal with class ‘A’ office space and boast quality properties. They have the best tenants.
But this may change in the future as more REITs are implemented. So always stick to the top rated REITs.
As the list of REITs grows over time, there will be more options for investors. Either way, this is one of the spaces retail investors need to keep an eye on in 2022.
This asset class can be a safe way to beat inflation.
Happy investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
(This article is provided from Equitymaster.com)
(This story has not been edited by NDTV staff and was automatically generated from the feed provided.)
