REITs – Serv­ing Small Bites of the Large Real Estate Pie

Shopping Center News - - CONTENTS - – By Shob­hit Agar­wal, MD & CEO - ANAROCK Cap­i­tal

REIT-listed of­fice as­sets are very likely to be fol­lowed by other REITable as­set classes in In­dia, in­clud­ing retail malls, ho­tels, etc. Post its reg­is­tra­tion with SEBI, units of REITs will have to be manda­to­rily listed on ex­changes and traded like se­cu­ri­ties

In­dia is wait­ing with bated breath for the ͤrst list­ings on its home-grown Real Estate In­vest­ment Trusts (REITs). In fact, the ͤrst list­ing will hap­pen within a cou­ple months. REITs are good news for in­vestors who have a small ap­petite - as small as Rs 2 lakh - and yet want to in­vest in the oth­er­wise highly cost-in­ten­sive com­mer­cial real estate mar­ket. With REITs, they can lit­er­ally take a small bite of the large In­dian com­mer­cial real estate pie.

One of the ma­jor real estate play­ers in the coun­try (Black­stone-backed Em­bassy Group) is in the process of launch­ing its ͤrst REIT to raise ap­prox. $1bil­lion as part of its strat­egy to mon­e­tize its ren­tyield­ing com­mer­cial prop­er­ties. Cur­rently, this re­alty ma­jor is in the reshuf­fling of its prop­erty port­fo­lio to in­clude as­sets across Ben­galuru, NCR and Mumbai.

The com­pany has more than 30 mil­lion sq. ft of leased ofͤce space and about 22 mil­lion sq. ft. more in the pipeline across cities. An­other player in the fray for list­ing REITs is IIFL Hold­ings.

REITs De­coded

Just like mu­tual funds, REITs are in­vest­ment ve­hi­cles that own, op­er­ate and man­age a port­fo­lio of in­come-gen­er­at­ing prop­er­ties for reg­u­lar re­turns. As of now, REIT-listed prop­er­ties are largely com­mer­cial as­sets - pri­mar­ily ofͤce spa­ces - that can gen­er­ate lu­cra­tive rental in­come.

REIT-listed ofͤce as­sets are very likely to be fol­lowed by other REITable as­set classes in In­dia, in­clud­ing retail malls, ho­tels, etc. Post its reg­is­tra­tion with SEBI, units of REITs will have to be manda­to­rily listed on ex­changes and traded like se­cu­ri­ties. Like listed shares, small in­vestors can buy units of REITs from both pri­mary and sec­ondary mar­kets.

Thus, be­sides low en­try lev­els, REITs will pro­vide in­vestors with a safe and di­ver­siͤed port­fo­lio at min­i­mal risk and un­der pro­fes­sional man­age­ment, en­sur­ing de­cent re­turns on in­vest­ment. REITs will not only be char­ac­ter­ized by in­vest­ment in real estate as­sets - they will also of­fer li­a­bil­ity for all unit hold­ers.

To en­sure reg­u­lar in­come to in­vestors, it has been man­dated to dis­trib­ute at least 90 per­cent of the net dis­tributable cash flows to the in­vestors at least twice a year.

That’s not all. As per the guidelines, 80 per­cent of the as­sets must be in­vested in com­pleted projects, and only 20 per­cent will be in un­der-con­struc­tion projects, eq­uity shares, money mar­ket in­stru­ments, cash equiv­a­lents, and real estate ac­tiv­i­ties.

Ex­pected ROI

Small in­vestors will raise a per­ti­nent ques­tion – will REITs be able to of­fer the same re­turns on in­vest­ment that they can ex­pect from ‘real’ real estate in­vest­ments? The an­swer is, prob­a­bly not. Deͤnitely, in­vestors who are hop­ing for un­re­al­is­tic re­turns (>20-30 per­cent) will need to look else­where. Be­ing re­al­is­tic in one’s re­turns ex­pec­ta­tions from REITs is im­por­tant. A re­al­is­tic ROI ex­pec­ta­tion would be in the range of 7-8 per­cent an­nu­ally, post ad­just­ment of the fund man­age­ment fee. With REITs, the ROI will be highly struc­tured, re­al­is­tic and risk-averse. REITs are ideal for in­vestors who want a steady in­come with min­i­mum risks. More­over, in­vestors can earn two types of in­come from REITs – one through cap­i­tal gains post the sale of REIT units, and the other via div­i­dend in­come. More­over, REITs will be a good in­vest­ment op­tion for in­vestors who are look­ing to di­ver­sify their port­fo­lio beyond gold and eq­uity mar­kets.

The Down­side

On the flip­side, a plethora of taxes have cur­rently made REITs more than a lit­tle unattrac­tive in In­dia. For in­stance, when a REIT sells shares of as­sets, the cap­i­tal gains are tax­able. Fur­ther, in other coun­tries where REITs have been func­tional for a long time have been ex­empted from stamp duty. Such tax beneͤts, if and when are pro­vided in In­dian REITs, will act like a cat­a­lyst in mak­ing REITs more func­tional and at­trac­tive in the long run. More im­por­tantly, if REITs be­come at­trac­tive to in­vestors via tax sops, chan­nels for for­eign fund­ing in In­dian real estate mar­ket will open up.

Global Play­ers Ga­lore

Sens­ing im­mense op­por­tu­nity, large global in­sti­tu­tional in­vestors are al­ready eye­ing In­dia’s real estate mar­ket through REIT-tinted lenses. These in­clude Ja­pan’s NikkoAm Straits Trad­ing Asia, US’ North Carolina Fund, Malaysia’s Hwang Asia Paciͤc REITs and In­fra­struc­ture Fund, Tai­wan’s East­spring In­vest­ments and Canada-based Sen­try Global. This ig­nited in­ter­est of global en­ti­ties is largely due to the uptick in ofͤce leas­ing ac­tiv­ity in ma­jor In­dian cities.

To be fair, the Gov­ern­ment and SEBI have in­cor­po­rated sev­eral changes time and again to make the is­suance of REITs a suc­cess. However, only time and cir­cum­stances can re­veal the ‘real’ suc­cess of REITs in In­dia.

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