Explained in this article are the key details of real estate investment trusts (REITs)
In mature markets like the US, Singapore, and Japan, real estate investment trusts (REITs) have been a popular product for many decades.
In India, on the other hand, the adoption of REIT has been slow. The market regulator, SEBI, formalized the REIT guidelines only in October 2013, after over a decade of preparations. The Securities and Exchange Board of India (SEBI) has since effectuated several changes in the regulation of REITs, to increase their popularity.
In this article, we will talk about all globally accepted aspects of REITs, how they operate and what has led to their lackluster performance in India, so far.
What are REITs?
Linked to real estate, REITs are investment vehicles that pool investors’ money like mutual funds and invest it for buying immovable assets of different kinds. These assets are managed in a way that ensures the generation of a regular income from rents and leases, along with capital appreciation. REITs can be traded on stock exchanges once they are listed.
An investment vehicle quite similar to mutual funds, because of its three-tier structure, REITs own and manage income-producing real estate properties including offices, malls, industrial parks, warehouses, hospitality, healthcare centers, etc. However, since REITs invest in real estate, they differ from mutual funds where the underlying asset is bonds, stocks, and gold.
REITs are operated and managed with the help of:
- A sponsor, who is responsible for promoting the REIT with his own capital;
- A fund management company, which is responsible for selecting and operating the properties; and
- A trustee, who ensures that the money is managed in the interest of investors.
Listed REITs in India
As of March end, 2021, India had a total of four registered REITs, of which three were listed.
The three listed REITS in India include:
To improve liquidity in REITs and bring in more listings, the SEBI, in 2021 lowered the minimum investment amount in a REIT, from Rs 50,000 earlier to Rs 10,000-15,000 now. After the market regulator approved the amendment to the SEBI (Real Estate Investment Trusts) Regulations, 2014, it also revised the trading lot cap of 200 units to just one unit.
While REITs can invest in all kinds of income-generating real estate assets, including residences, offices, hotels, malls, and warehouses, REITs in India are primarily focused on commercial real estate.
Returns from REITs
In a fast-moving set-up, returns on commercial real estate could range between 8% and 10% per annum but can go as high as 15% in the case of Grade-A office space. However, REIT yields in India have so far been close to the yields on safe bonds and post office schemes. Only after the REIT market in India matures, can one expect a 10% yield here, opine experts.
According to a report by ICICI Securities Ltd, the three real estate investment trusts in India are expected to offer distribution yields of 6%-9%, starting from the financial year 2022 to 2024, along with 12%-18% capital appreciation.
The risk of volatility is also much less in REITs when compared to the stock market, mutual funds, and gold, as they are mandated to keep 80% of their listings from rent-generating assets. Also, SEBI regulations made it mandatory for REITs to distribute 90% of their income to unit-holders in the form of dividends or interest income, or both.
However, the rental market in India is impacting income generation for REITs as it grapples with the challenges posed by a growing tendency among companies to offer remote working – pan-India Grade-A office space vacancy levels across the top seven cities rose by over 300 basis points till June 21, 2021, to 16.6% after the first wave of the Coronavirus pandemic.
Also, note that since real estate cycles are not very short-term, one needs to be invested in REITs for a period ranging between three and five years, to reap the benefits of this investment tool.
Since there is two-layered earning on investment in REITs, the investor is taxed differently for each income. The income that a unit-holder makes in the form of dividends during the holding period is entirely taxable in the hands of investors, according to one’s applicable tax slab. The income that the investor generates by way of selling the REIT is considered capital gains. In case REIT units are sold in less than one year, short-term capital gains (STCG) tax of 15% on the profit earned will apply. In case REITs units are sold after one year, long-term capital gains (LTCG) tax of 10% will apply on profit exceeding Rs 1 lakh.
Should you invest in REITs?
Even though REITs provide retail investors with an opportunity to diversify their portfolios and are largely considered risk-averse, their limitations make experts advise caution to those who intend to invest.
Apart from the fact that there is no historical data to compare gains, the performance of the few REITs that are operating in India could be adversely impacted since companies have considerably changed their approach towards remote working after the Coronavirus pandemic. If the work-from-home model is to continue for long, the occupancy rate at top-grade commercial offices will decrease, adversely impacting rental yields.
However, the ICICI Securities report offers a different point of view. The report says that commentary by REIT managers and other large office developers indicate that leasing discussions, which were on hold due to the second wave of the Coronavirus pandemic, have since revived, with existing occupiers talking about potential expansion and tenants who were looking to surrender space earlier looking to retain and possibly expand space.
REIT investors also have to keep in mind that equity assets are meant for long-term investment, as short and medium-term growth might not be handsome.
The absence of any benchmark to compare their performance is another fact acting against REITs. Since there are only three listed REITs in India so far, investors have highly limited choices, as well.
Latest updates on REITs
REITs to be included in Nifty indices
Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) will be included in the Nifty indices from September 30, 2021, according to the new eligibility criteria announced by the NSE. The National Stock Exchange has said that all equity shares, REITs, and InvITs that are traded – listed and traded and not listed but permitted to trade – at the stock exchange are eligible for inclusion in the Nifty indices. Before this, only shares traded on the NSE were eligible for inclusion in the Nifty indices.