Synopsis
- 1 Understanding Real Estate Investment Trusts (REITs) In India: Types, Benefits, And Investment Options
- 2 REITs
- 3 What are Real Estate Investment Trusts (REITs)?
- 4 How REITs Work?
- 5 Types of REITs in India
- 6 Advantages of Investing in REITs
- 7 Limitations of Investing in REITs
- 8 How to Invest in REITs in India
- 9 Existing REITs in India
- 10 Factors to Consider When Assessing REITs
- 11 Conclusion
- 12 FAQs
Understanding Real Estate Investment Trusts (REITs) In India: Types, Benefits, And Investment Options
REITs
Navigating the real estate market in India can be quite the challenge, especially when it comes to understanding the various investment options. Real Estate Investment Trusts (REITs) offer a unique solution, enabling investors an entry point into this lucrative sector.
This comprehensive article will decode REITs for you, outlining their types, benefits and how you can start investing in them. Intrigued? Let’s venture deeper into the realm of REIT investing!
Key Takeaways
- REITs are like stocks for real estate. They let you own part of big properties.
- To invest in a REIT, you can buy shares on stock exchanges or through mutual funds.
- The types of REITs include Equity, Mortgage, Retail, Residential, Healthcare and Office. Each type has its special way to earn money.
- Investing in REITs brings benefits such as regular income from rent, less risk by sharing it across many properties and ease of selling your share if needed.
- But be careful! There are downsides too such as less tax breaks than other investments and the chance that your investment’s worth could go down when market is bad.
What are Real Estate Investment Trusts (REITs)?
Real Estate Investment Trusts (REITs) are companies that own, operate or finance income-producing properties, offering investors a way to invest in portfolios of these real estate assets similar to investing in stocks.
Definition
REITs are like mutual funds but for real estate. They hold and manage land, buildings, or other property that make money. This can take the form of rent from an apartment building, fees from a toll road, or sales at a mall.
Many people chip in their money to buy these properties together through REITs. The company that runs the REIT takes care of all the work with buying and running these properties. This lets investors earn money without having to be landlords themselves!
Did You Know?
India saw its first REIT (Real Estate Investment Trust) in 2019. As of Nov, 2023 there are totally 3 REITs listed publicly in India.
REITs had significantly gained popularity as an investment vehicle among investors.
Qualifications for a company to be a REIT
A company needs to meet certain rules to be a REIT. Here is the list:
- The company must invest at least 80% of its assets in real estate.
- 80% of a REIT’s asset value must be in completed and income-generating real estate.
- It has to distribute at least 90% of income to investors as dividends.
- The company should be managed by a board of directors or trustees.
- REITs should have a minimum of 100 shareholders after its first year of existence.
- Not more than 50% of its shares should be held by five or fewer individuals during the last half of the taxable year.
- It should offer shares that are freely transferable.
- The company should earn at least 75% of its gross income from rents, interest on mortgages, or from real estate.
- The business structure must be a corporation, trust, or an association.
How REITs Work?
REITs operate by pooling funds from numerous investors to purchase properties; these can range from office buildings and shopping malls to hotels and apartments. Managed by professionals, REITs generate income through renting, leasing or selling these properties, the money earned is then distributed among the investors as dividends.
How Do REITs Generate Returns for Investors?
REITs are a great way for people to make money.
- The first way you can earn from REITs is through interest on your investment. This works much like the interest you get from a bank when you save money with them.
- The second way to make money is by getting dividends. These are part of the income made by the properties owned by the REIT and are given out often, usually every three months.
- Lastly, there’s capital gains. This happens when the worth of buildings or lands owned by the REIT goes up in value over time. You can sell your shares in that case and make a profit!
So, investing in REITs gives different ways to add more money into your pocket!
Types of REITs in India
India offers a multitude of REIT types, including Equity, Mortgage, Retail, Residential, Healthcare and Office REITs – each offering unique opportunities for investors. Delve into the blog to explore these diverse REIT classes in depth.
Equity REITs
Equity REITs let you tap into the real estate market. They buy, set up, and manage properties like offices or hotels. When they sell these properties, they make money.
You can invest in Equity REITs by buying shares on a stock exchange. You can also put money in a REIT mutual fund. Investors like this because they offer steady income and chances to make more money over time.
These types of investments are spread across many places and sectors. So, your risk is more spread out too. This makes Equity REITs a good choice for those seeking to lower their risk when investing in property.
Mortgage REITs
Mortgage REITs in India, also known as mREITs, lend money to real estate buyers. They may also buy existing mortgages. These are a type of REIT available in the country. Just like mutual funds, these mREITs are traded openly.
They own, manage and make money from properties that bring in income. Their focus is on lending money for real estate deals. By investing in Mortgage REITs, investors get to earn from interest payments on loans provided by them.
Retail REITs
Retail REITs in India own and manage shopping areas. This might include malls, retail centers, or outlets. You can invest in these areas without having to buy the land yourself. Buying shares of Retail REITs on a stock exchange is one way to invest.
They offer steady income and the chance for your wealth to grow over time. But note that there are taxes you need to pay when you get money from Retail REITs! So be smart about it, just as with other investments!
Residential REITs
Residential REITs focus on buying and managing housing places. They can own a lot of different homes, like apartments or whole living areas. By investing in Residential REITs, you get to be part of the home sales market but without having to buy a house yourself.
These trusts make money when people pay rent for living in their houses. Over time, the value of these houses also go up which means even more money is made by the trust.
Healthcare REITs
Healthcare REITs are a way to tap into India’s ever-growing health sector. They put money into real estate properties tied to healthcare services. This can be things like hospitals, nursing homes, and medical centers.
By investing in these REITs, you become part of the health sector growth journey. The best part is they aim to give steady returns over time. So not only do you help meet the high demand for healthcare spaces, but you also make your money work hard!
Office REITs
Office REITs put money into places where people work. These are often big buildings or groups of offices. When a company rents space in these buildings, the Office REIT earns money.
This is great for those who want to have a part in the real estate market but don’t want to buy property themselves. Rent from office spaces gives them regular money coming in. The value of their share can also grow over time.
But they should think hard about all sides before putting their money here.
Advantages of Investing in REITs
Investing in REITs allows for fractional ownership of large-scale properties, yielding regular income and potential capital appreciation. It offers diversification by spreading the risk across multiple properties, provides liquidity as REIT shares can be easily bought or sold like any other stock on the exchange, and ensures corporate governance due to regulatory oversight.
Fractional ownership
Fractional ownership lets you own part of a pricey property. REITs use this system. Many people pool their money. They buy large, costly properties together. This way, you don’t need to have a lot of cash to start investing.
You get your share from what the property earns. Having parts in many different properties is easy with fractional ownership in REITs too! Also, selling your part is simple if needed because it’s liquid unlike real estate properties.
Regular income
REITs give you money on a regular basis. They own property that they rent out. The rent they collect is given to investors like you. This is called rental income. It adds up over time and can be quite large.
The money doesn’t stop coming in even if the market goes down. Being part of a REIT means stable cash flow is yours to enjoy!
Capital appreciation
Capital appreciation is a key benefit of REITs. This means your money can grow over time. As property prices rise, so does the value of your investment in REITs. You buy shares at a lower price and sell them at a higher one later on.
That’s how you make profit with capital appreciation! But, this growth does not happen fast. It takes time and patience for your investment to increase in worth when market conditions are good.
Diversification
REITs can make your cash spread out. You don’t put all your eggs in one basket with REITs. Instead, you own bits of many properties. This is called diversification and it keeps risk low.
It’s like buying many types of stock instead of just one. The more variety, the safer your money is from big losses if one property does not do well. With REITs, risks are shared across a big group of real estate assets.
Plus, little investors get to be part of a wide array of properties which are managed by experts!
Liquidity
REITs are like stocks. You buy and sell them on the stock market. This means they offer high liquidity. You can sell your REIT units at any time you want. So, if you need money fast, REITs make it easy for you to get it.
With REITs, there is less risk of not being able to sell when you need to.
Corporate governance
Good corporate governance is key for REITs. It keeps the company on track and helps protect your investment. A board of directors oversees the actions of a REIT’s management team. They make sure everything follows rules and laws.
The board also makes big decisions, like picking leaders and setting goals. Their job is to act in the best interest of all investors, not just a few rich ones. This keeps things fair and open with clear roles for everyone involved in running the trust.
It aids in creating an honest environment where no one can hide misdeeds or bad choices that could hurt your investment.
Limitations of Investing in REITs
Investing in REITs has some downsides.
- First, there are not many options in India. Only three REITs and one global REIT Fund of Fund exist here.
- Second, it can be hard to buy or sell because there aren’t a lot of people doing this yet. So, your money might get stuck for a while until you find someone willing to trade.
- Third, you won’t get certain tax breaks that other investments give you.
- Fourth, like all stocks, REITs carry market risk – if the economy goes bad, so could your investment’s value.
- Fifth problem is slower growth when compared with other asset types like tech stocks or startups where big gains can happen fast but loses too.
- Sixth issue is that returns may look good on paper but when adjusted for risk they may not be great as they seem.
- Finally, exposure to real estate sector via investing in Indian REITS is limited which means scope for diversification within the portfolio is small.
How to Invest in REITs in India
![How to invest in REITs](https://thesundayfinancials.com/wp-content/uploads/2023/11/high-angle-pie-chart-with-cities-1024x682.jpg)
Investing in REITs in India can be accomplished through a variety of methods such as purchasing shares on stock exchanges, opting for mutual funds that include REITs, or participating directly in an Initial Public Offering (IPO).
Delve deeper to understand these investment avenues.
Investing through stock exchanges
You can buy REITs on stock exchanges the same way you buy stocks. These trades happen during market hours. All you need is an account with a stock broker. Once your account is ready, look for the REIT’s name or ticker symbol on the exchange.
Click ‘Buy’ to add it to your portfolio. It’s quick and easy!
Investing through mutual funds
A fun way to put money in REITs is through mutual funds. Some funds in India like the Kotak International REIT Fund of Fund make this easy. This fund puts all its money into global REITs.
You can buy or sell these funds any time you want.
Not many Indian mutual funds put money in REITs though. Still, if you choose this path, be ready for a ride! Your gains will move up and down with the real estate market. But remember, it’s an awesome way to get stools in the real estate game without buying land or buildings yourself.
Investing through IPOs
IPOs let you buy REIT units first. You can do this when a REIT company goes public. This means the firm is selling its stocks to people for the first time. This way, you can get in on the ground floor of a new business venture in Real Estate Investment Trusts in India.
It is one way to start investing in Indian REITs.
Existing REITs in India
This section will delve into the existing REITs in India, providing deeper insights into Embassy Office Parks REIT, Mindspace Business Park REIT and Brookfield India Real Estate Trust; exploring their portfolio size, market capitalization, and performance.
Embassy Office Parks REIT
![Embassy REIT](https://thesundayfinancials.com/wp-content/uploads/2023/11/Screenshot-2023-11-05-at-7.22.07 PM.png)
Embassy Office Parks REIT is a big name in India. It was the first of its kind to list on the Bombay Stock Exchange in 2019. This trust holds many office spaces in big cities across India.
Big companies rent these spaces for their offices. The money from rents is used to reward those who put money into the REIT. Many investors love it because they enjoy steady returns without doing much work.
Mindspace Business Park REIT
![MindSpace REIT](https://thesundayfinancials.com/wp-content/uploads/2023/11/Screenshot-2023-11-05-at-7.22.18 PM.png)
Mindspace Business Park REIT is a key player in India’s real estate market. It became an official trust on November 18, 2019. This REIT gives you a chance to put money in the property business.
Mindspace stands strong with two other options: Embassy Office Parks and Brookfield India Real Estate Trust.
Being part of Mindspace means owning a piece of top-tier commercial assets. It also promises better control over your investment because it’s bound by the Indian Trusts Act rules. So if you want steady earnings from real estate without buying whole properties, consider Mindspace Business Park REIT.
Brookfield India Real Estate Trust
![Brookfield REIT](https://thesundayfinancials.com/wp-content/uploads/2023/11/Screenshot-2023-11-05-at-7.22.27 PM.png)
Brookfield India Real Estate Trust is a leading player in the REIT market. It stands out as the only real estate trust that is fully run by an institution. The trust owns assets all over India, which helps spread risk and boosts profits.
They have good scores from rating agencies too. If you want to buy shares in this trust, use apps like Zerodha or try REIT mutual funds.
As of Q2, 2023 below are the broad comparison of all 3 REITs in India.
Parameter | Embassy REIT | MindSpace REIT | Brookfield REIT |
Portfolio | 43.2 msf | 31.9 msf | 18.7 msf |
Tenants | 223 | 185 | 72 |
Occupancy Rate | 87% | 87% | 84% |
In-Place Rent | ₹ 79 psf | ₹ 63 psf | ₹ 64 psf |
WALE | 7 years | 6.8 years | 6.9 years |
Gross Asset Value | ₹ 50,841 Crore | ₹ 27,300 crore | ₹ 16,400 crore |
Revenue from OPS | ₹ 1,686 Crore | ₹ 988 Crore | ₹ 594 Crore |
Operating Income Net | ₹ 1,381 Crore | ₹ 818 Crore | ₹ 475 Crore |
Interest Rate Avg. | 7.10% | 7.30% | 7.45% |
NAV per Unit | ₹ 400.71 | ₹ 370.30 | ₹ 337.00 |
Distribution Yield* | 6.2% | 5.6% | 7.0% |
* – as of Nov, 2022.
Geographical Presence
Location | Embassy REIT | MindSpace REIT | Brookfield REIT |
Bangalore | 74% | ||
Delhi & NCR | 7% | 67% | |
Hyderabad | 37% | ||
Mumbai | 10% | 37% | 17% |
Pune | 9% | 19% | |
Others | 7% | 16% |
Diversified geographical presence is better to manage with political and other natures.
Factors to Consider When Assessing REITs
When evaluating REITs for potential investment, consider factors like the Weighted Average Lease Expiry (WALE), committed occupancy, vacancy rates, net operating income & EBITDA growth, Net Asset Value (NAV), and net distributable cash flow.
Weighted Average Lease Expiry (WALE)
The Weighted Average Lease Expiry, or WALE, is a tool that tells how long it takes for leases in a property portfolio to end. It’s like a stopwatch for leases. A longer WALE means there’s less risk of empty spaces because the leases don’t end soon.
In India, the typical WALE for REITs is around 6.5 years. Most leased areas in Indian REITs belong to just ten renters, making up 75% of all rented space!
Committed Occupancy
Committed occupancy is a key term in REITs. It tells how much space is rented out in a property. High committed occupancy means more rent money for the REIT. This can lead to better profits and higher returns for investors.
It’s best for a REIT to have an occupancy rate of 85-90%. A high number shows that the building or place has strong demand. Spots that are empty do not bring in any cash. An investor should look for a high rate if they want steady incomefrom their investment.
Vacancy Rate
The vacancy rate is a key part to think about when looking at REITs. It tells us the percent of empty units in a property run by a REIT. If the vacancy rate is low, that means many people want these properties.
This could lead to more money from rent. Things like how the market is doing, where the property is, and how good the managers are can change this rate. So before you put your money into REITs, take some time to look at how high or low their vacancy rates are along with other things!
Growth in Net Operating Income & EBITDA
Net operating income (NOI) and EBITDA are vital to REITs. A rise in NOI means the property earns more profit after costs. This shows good management of assets, such as malls or offices.
More earnings before interest, taxes, depreciation, and amortization (EBITDA) points to strong business health. It hints at a company’s ability to make money from its core operations without factoring financial or accounting items.
Both growing NOI and EBITDA suggest trust stability and success over time.
Net Asset Value (NAV)
The Net Asset Value (NAV) is a key thing to look at for REITs. It tells you how much each share of the REIT is worth. To find it, add up all the REIT’s assets and subtract its debts.
Many people who know a lot about REITs use NAV to figure out what price to pay for a company. It’s better than other ways of seeing value, like looking at book prices. So, when you’re thinking about investing in a REIT, make sure to check out its Net Asset Value!
REITs NAV differs from Mutual Funds NAV where Mutual Funds NAV is calculated on daily basis but the REITs NAV calculation will be done by every 6 months. Since evaluating all the property value of each REIT holding on daily basis doesn’t make any practical sense.
Net Distributable Cash Flow
Net distributable cash flow is key in REITs. It tells us how much money can be given to the people who own units in REITs. In simple terms, it’s like their share of the profit.
In India, most of this money must go to unit holders. The law says at least 90% has to be shared out. This rule helps make sure that profits are given back to those who put money into REITs.
Distribution Yield
Distribution Yield = Return*/Current Market Price
* Return Annualised – Dividend + Interest
* the formula might vary per REITs calculation.
- Distribution yield is the return earned by REIT unit holders as a percentage of the current market price.
- Differing methods of calculating distribution yield can affect investors’ returns.
Distribution yield of all 3 REITs is on averaging varying between 5.5% to 7%. please refer the above table.
Taxation
- Taxation for REITs in India includes exemptions on rental income, leasing, interest, and more.
- Different tax treatments can apply depending on the REIT’s structure and concessions.
- Tax treatment of dividends might vary among REITs.
Conclusion
Real Estate Investment Trusts, or REITs, give you a way to buy land. They make it easy for anyone to own part of a big property. Some people like them because they pay money often.
Others use them to add something different to their mix of things they have bought with their money. But keep in mind that there are rules about taxes and such when you deal with REITs.
FAQs
1. What is a Real Estate Investment Trust (REIT) in India?
A REIT in India is like a company that owns and handles income-generating real estate such as co-working spaces, vacation properties, and more.
2. How does an investment in Indian REITs work?
When you invest money into a REIT in India, you buy shares of the trust’s properties through stocks. This allows for fractional ownership of commercial real estate which can produce passive income.
3. What types of REITs are there in India?
In India, several types of REITS exist including Embassy REIT, Mindspace REIT, Brookfield Reit and Nexus Select Trust.
4. Are there pros and cons to investing in Indian REITS?
Yes! Investing in these trusts offers high returns on property management but be aware they come with their own risks so it’s smart to know all your options.
5. Can I get out if I need to from my fractional Ownership Model?
Yes! There exit strategies for owners who want to sell or change their stake.
6. How REIT differ from owning a physical property?
Firstly, REITs reducing the risk of investing a huge sum of amount to own a physical commercial property and maintaining the same. It provides opportunity for every retail investors to be a owner in such properties by investing via REITs.
7. Can REITs pave the way to wealth?
Investing in Real Estate Investment Trusts (REITs) is akin to any other investment venture, replete with its own advantages and potential pitfalls. It’s imperative for investors to meticulously examine the array of REIT options at their disposal before arriving at an investment verdict. It would be erroneous to presume that REITs guarantee perpetual positive returns, as they, too, are subject to the multifarious influences of the market.
8. Is it possible to experience financial losses with a REIT?
REITs, which distribute dividends based on their earnings, carry the potential for a decline in value when interest rates increase, particularly in the case of publicly traded REITs. Additionally, there exists a risk of financial setbacks with non-traded or non-listed REITs, which can prove challenging to research thoroughly.