REITs or a Real Estate Investment Trust is a company that owns, operates, and finances income-generating real estate. REITs hold and operate a portfolio of rent-generating commercial buildings, similar to mutual funds that own a portfolio of stocks.
A fairly new concept, REITs entered the Indian market in 2019, with Embassy Park REIT becoming the first listed REIT in the country. In India, the market watchdog regulates only public-listed REITs registered with the Securities and Exchange Board of India (Sebi), as opposed to the United States, where private and public non-listed businesses are regulated, too.
REITs are now available for purchase on the stock market in India, allowing you to own a piece of the income-generating portfolio. As an investor in an REIT, you can make money in two ways: through dividends, and the increase in the value of your stock. REITs are mandated to deliver 90 per cent of their portfolio’s net rental revenue as dividends, or interest to their shareholders.
Why Invest in REITs?
REITs are a steady source of income with minimal risks, as they invest in commercial real estate like offices and shopping malls that yield a regular rental income. Here are some of the pros of investing in REITs. The total returns from investing in REITs range from 12-20 per cent per year, including dividends and capital appreciation. Returns from dividends are 5-7 per cent per year.
1] Instant Liquidity: An REIT share offers instant liquidity, since it is publicly traded. Imagine selling real estate in seconds!
2] Affordability: You can buy just one share of an REIT starting from approx. Rs.300-350 per share. That’s as good as buying real estate with just a few hundreds of rupees.
3] Safety: Being publicly traded, REITs are regulated by Sebi, which makes them tightly regulated.
4] Tax Benefits: By law, REITs have to distribute 90 per cent of their income as dividend and interest income to shareholders. Even better, more than 90 per cent of the dividend you receive from certain REITs is exempt from tax. Do consult your tax expert, though.
5] Diversification: REITs allow you to diversify your real estate portfolio across multiple locations in India rather than putting all your eggs in one basket.
Factors To Consider While Investing In REITs
1] Portfolio Occupancy Percentage: You should find out how much percentage of the completed area is rented out? Occupancy percentage is a good indicator of the stability and success of the portfolio.
2] Tenant Quality and Sectoral Diversification: A strong tenant in a booming sector (IT, Pharma, Manufacturing, etc.) matters, as that reduces vacancy risk as well as the risk of paying rentals late.
3] Number of Tenants: The more the number of tenants, the more diversified you are as an investor. More tenants occupying less space each is better than lesser tenants occupying huge space individually. If the tenants occupying huge space vacates, then the vacancy level increases in one shot.
4] Geographical Diversification of Portfolio: REIT owning assets in different micro markets or cities is better and more diversified than REIT holding assets in majorly one or two micro markets.
5] Dividend Yield: This shows the health of the managing entity and the portfolio. Also, a higher dividend yield means higher returns for an investor.
6] Past Stock Performance: Evaluate past performance and increase in stock price over one year, six months, and three months. If the stock has momentum, it’s good.
7] Growth in Revenue/Profits of the REIT: There are some big differences due to the accounting treatment of the property. Traditional stock indicators like earnings-per-share (EPS) and price-to-earnings (P/E) ratios are not particularly trustworthy ways to evaluate REITs. Growth in rental income, growth in portfolio value, and growth in profits (net operating income) are the true indicators.
8] WALE (Weighted Average Lease Expiry): This is the average lease tenure remaining for the tenants occupying the buildings that make up the REIT. This shows the stability of the portfolio. Higher WALE amounts to less vacancy risk.
9] Brand Name/Developer Name: A reputed real estate developer and fund manager with a proven track record will ensure high-quality development, portfolio stability, and asset management.
Risks Involved By Investing In REIT
1] Vacancy Loss: This is denoted as credit loss, which refers to the amount of rental income that the property owner loses when the space is unoccupied by tenants. The term is generally associated with a negative connotation. In simple words, the portfolio has a vacancy risk if the tenants vacate the property.
2] Limited Options of REITs in India: Currently, India has only three listed REITs, which makes for a very limited choice for investors.
Final Take On Investment
REITs are an attractive and relatively new way to invest in real estate. REITs are gaining popularity among real estate investors who are looking for safer, affordable, and accessible investment options. Everyone has their own goal for investment. Read, research, tick all the checkboxes, and make the best investment decision that suits your risk appetite.
The author is co-founder, PropReturns
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)