Real estate investment trust (REITs) have been a popular investment instrument across the world, however, Indian capital markets have witnessed its first initial public offering (IPO) recently. REITs is a medium for small and mid-level investors in commercial reality and gain at least a return of 7-8 per cent annually.
As per SEBI regulations, a REIT shall invest either in commercial real estate assets or through special purpose vehicles (SPVs). It was first introduced in 1960 in the US, to give ordinary investors access to real estate investment.
Changing the Structure
REITs are expected to be a game changer for the Indian real estate industry as they have bought into force capital investment and transparency at a time when the real estate sector was facing concerns like NBFC Crisis due to the asset-liability mismatch, liquidity crunch, etc. REIT IPO has definitely done wonders for Nifty Realty Index, since the market was trading at its highest peak since September 18th, 2018 reiterating the improved transparency bringing in confidence in the Indian realty market. REIT works just like mutual funds they help in sponsoring assets through trust and help the investors become owners of varied properties.
Commercial real estate market had seen a downfall, however, after the implementation of REIT one can say that it’s now seen as an opportunity for the commercial markets to grow again which will help the investors looking for steady returns, beyond fixed deposits and fixed income funds.
The True Nature
Now, the question is how REIT will repay the shareholders with profit. However, REITs is mostly operated in a straightforward and easily sustainable business model. They lease the space and collect rent which helps the company generate income to pay back to the shareholders with profit.
As per REITs guidelines, at least 80 per cent of the value of the REIT assets must be invested in completed and revenue generating properties whereas the balance 20 per cent may go in under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities. It will lead to the generation of alpha in terms of potential returns for investors. REIT provides an avenue for institutional investors as well as retail to participate in real estate ownership.
REIT’s has its advantages as well as its disadvantages:
1. Investors invest in REIT mainly for higher income and long term growth
2. It helps investors diversify their income streams.
3. As the REIT shares are traded over major stock exchanges, it is easier to buy and sell making it more liquid than the real asset.
4. Although stock markets can generate good returns during a bull run, the associated risks are very high. REITs are a more stable investment option.
Property tax can rise with the decision of the municipal authorities and the budget revenue may vary. This will result in reduced REITs earnings. REITs can only reinvest a maximum of 10per cent of their annual profits back into their core business lines. This will have the REIT grow at a slower pace.
The over-subscription of India’s first Real Estate Investment Trust (REIT) issue reflects positive investor appetite for banking assets in the real estate sector. REITs will definitely improve liquidity in the sector and help attract investment from local and global investors, as the entry point for an investor is as low as INR 2 lakh. However, the success of REITs will purely depend on the return on these investments extended to investors.