India‚Äôs Real Estate Investment Trust (REIT) has finally become a reality. The first REIT filed by Embassy Office Parks, a Bengaluru-based real estate developer backed by Blackstone Group LP, a private equity firm was opened for investment from 18-20 May, 2019. The IPO was subscribed 2.58 times, with institutional investors subscribing 2.15 times of the portion. Retail investors and HNIs had subscribed 3.1 times.
What is REIT?
A REIT is an investment vehicle that allows investors to invest in real estate and hold properties, and then lease it out to earn rental income. In India, REIT is only allowed for investing and holding commercial properties. In simple terms, REIT works like a mutual fund by pooling investments from domestic and international investors and then investing in income generating properties, mostly commercial assets. The minimum subscription has been reduced to 50,000 from 2 lakhs, helping small investors to participate. The Embassy REIT‚Äôs portfolio comprised of 33 million sq ft of office space across seven parks and four prime city-centre office buildings. The portfolio has a 95% occupancy rate and more than 160 blue-chip tenants. The office properties that are part of the portfolio include Express Towers in Nariman Point and First International Finance Centre in Mumbai.
It was one of the most awaited events in the real estate industry and the over-subscription is encouraging sign at large, especially for the commercial segment. It will not propel investments in the commercial real estate sector but will pave the way for future investments in the sector, thus giving developers the much-needed liquidity. There is no better time to launch REIT and pumping monies from domestic and international investors in the beleaguered real estate sector.
Also Read: All you need to know about India‚Äôs first Real Estate Investment Trust
Minimum Investment required to invest in REIT
As per SEBI rules, the minimum threshold to invest in REIT is INR 2lakhs. However, the issuer should indicate a minimum lot size for investment in the offer document.
Trading on exchange
Once the REIT offer is closed, the investor can sell the units on the exchange. The minimum lot size for exchange is INR 1 lakh.
How REITS are taxed?
The income earned from REIT is subject to tax depending upon the nature and proportion of receipts. The income received in the form of dividends/interest and will be subject to short-term and long-term capital gains depending upon the holding period of the investment.
Commercial office space absorption in India in 2019
As per the industry estimates, the overall absorption has reached 49 million sq ft in 2019. The successful launch of REIT is a reflection of success in the realty sector. There has been immense interest from the NRIs too for large commercial spaces, and have started investing in commercial real estate assets.
Return from REIT/Expected returns
The projected 5-year return from commercial assets is 10-12% percent due to huge investments in Grade A commercial assets. The commercial real estate withstood the declining sales of the residential segment. Apart from the higher yield, there are chances of capital appreciation too.
Should you invest in REIT?
Real estate has always attracted investors, but due to high-ticket size, many investors have stayed away from the sector. Investing in commercial buildings such as Grade A office building is out of the question. REIT can provide an option for retail investors who can invest a portion of their wealth as the minimum investment is low. Commercial real estate has always been a very high capital-intensive affair. REITs can be a viable option for investors to park their wealth in the commercial portfolio after analyzing the profit or risk in the asset class. As Embassy Office Parks has launched first REITs in India, there is no history related to profit or risk associated with it.
There are several stark realities associated with REIT, and many of them are beyond the control of fund managers. The profitability will depend upon the chosen sub-markets, which might face adverse conditions. Tenant leases also face problems such as non-renewals and even premature termination. This can hamper REIT‚Äôs income generating ability. Therefore, an investor should weigh the following parameters before investing in REIT:
‚Ä¢ Does the REIT portfolio has a strong profile of tenants?
‚Ä¢ What is the committed occupancy does it enjoy?
‚Ä¢ What is the average lease period?
Does it offer long-term lease contracts, thus providing earnings stability with minimal chances of default?
Geographically diversified quality commercial space
These factors will analyze the success of REIT in the years to come. There is no guarantee of returns or profits for the investors. It is only a tool to leverage growth in the realty sector. It more like a fund operated by the asset management company. And one can invest to generate income from such assets. Any gain realized from such investments, of held for more than 36 months will attract capital gain tax at 10 percent, if STT has been paid on the transaction. For the units held less than 36 months, the capital gain tax will be at 15 percent.
One needs to invest for a long-term horizon as similar to other asset classes to generate a decent return. The expectations from the market will be low-to-mid returns. REITs will be less volatile as regulations maintain the more than 80% of the asset should be rent-generating assets. Typically, commercial leases are of long tenure i.e. six or nine years, with a rent escalation clause. Also, one needs to demat account to invest in REITs. The retail investors need to wait till the time mutual fund managers offer this as a part of their portfolio, which is at least a few years away.
REITs will play an important role in the formalization of the real estate sector. It will offer the beleaguered developers to promote their commercial portfolio via REIT. On the other hand, SEBI must launch an aggressive campaign to promote REIT among retail investors similar to mutual funds. Advisors have to equip themselves with knowledge about the commercial asset class. The listing will be closely watched by all the investors and property market participants.
Shoprwise suggests that retail investors should wait and watch before taking the leap of faith. REITs are a relatively new offering for Indian investors and further iterations by the regulatory can be made in the future. Typically, REITs tenure is 9-15 years, with built-in rent escalations after 3 years. A well-diversified mix of commercial assets is usually beyond the scope of HNIs. REITs give the opportunity to such investors to but premium REIT with quality tenants, high occupancy, and minimal chances of default. For wealth managers, it is a handy hedge tool for wealth diversification.