REIT –To be or not to be?

image

Recently, I had met a friend of mine over dinner. He is into mutual funds and financial services. So we got to talking and he suggested that there was this real estate project in some city of Gujarat in which I could invest some money and earn regular income from the rent generated from that property. I wasn’t sure about the investment but the idea did look good. So the inquisitiveness led to some research and I stumbled upon the correct term – REIT. (Real Estate Investment Trust)

What is REIT?

It is fairly a new concept in India.

REITs basically pool money from investors and invest them in income-generating assets offering investors a way to invest in property. These are much alike mutual funds. While mutual funds provide for an opportunity to invest in equity stocks, REITs allow one to invest in income-generating real estate assets or commercial properties. This gives an opportunity to those people to invest in the real estate who cannot otherwise afford to invest in the expensive real estate sector.

With REITs, investors can start with as small a sum as Rs 2 lakhs, to secure units in exchange.The REIT platform has already been approved by the Securities and Exchange Board of India(SEBI).

‘Considering the capital-intensive nature of the commercial real estate sector as an investment avenue and also the limited investment opportunities with regards to high-grade office assets, REITs (Real estate investments funds) will be a big boon for the Indian real estate industry.’ – Ramesh Nair, CEO&Country Head, JLL India.

Why REIT?

I was reading this article somewhere on why REIT and found these points in favour -

Income dividends: 90% of distributable cash, at least twice in a year. This could work as stable income source for unit holders.

Transparency: REITs will showcase the full valuation on a yearly basis and will also update it on a half-yearly basis.

Diversification: According to the guidelines, REITs will have to invest in a minimum of two projects with 60% asset value in a single project.

Lower risk: At least 80% of the assets will have to be invested into revenue-generating and completed projects. The remaining 20% include under construction projects, equity shares of the listed properties, mortgage-based securities, equity shares that derive a minimum of 75% of income from government securities or G-secs, money market instruments, cash equivalents and real estate activities.

Picture Courtesy – Wealth Forum

The introduction of real estate investment trusts (REITs), will provide a platform that will allow all kinds of investors to make safe and rewarding investments in the Indian property market.

Types of REIT

There are internationally three types of REITS. In India however, a beginning is made with the third type, the hybrid one.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages. REITS in India will be predominantly of the Hybrid type.

Actual property purchase Vs REIT – What to choose?

Investing in REIT, can be compared to investing in gold bonds. We, as Indians, still consider and are partial to buying physical gold, rather than in gold bonds.

Similarly, having one’s own property will always provide Indians with greater satisfaction, than mere paper investments. Having given this as point, let me share something more with you for the other side of the coin.

My friend had bought a flat in Thane for INR 25 lacs 12 years ago. Today it will fetch over INR 2 crores. But if he wants to buy the same size property today, it will cost him over INR 3 – 3.5 crores.

So, considering this fact REIT may provide an alternative solution at least in metro and metropolitan cities.

REIT is fairly new but all major road-blocks have almost been eliminated. In 2016, finance ministry decided to remove the DDT clause. This is considered a big leap forward in the implementation of REITs in India.

Road Ahead?

We being the 2nd most populated country and 7th largest in terms of land, demand for real estate has a lot to offer in the scope of REIT. REIT can be the answer to the financial woes of the builders who are facing a lot of crunch in order to complete their projects.

Although there are risks also involved in REIT as well but as of now it is in initial stages and for once let’s try having a positive mindset and look forward towards this new investing option.