The concept of REIT is quite new (in India) but it is very similar to the concept of mutual funds. 'Real-Estate investment trust' as the name suggests is a collection of investment funds from investors who are interested in getting real estate for rental purposes. Like mutual funds, there is a manager who collects funds and categorizes them in their respective portfolios, and invests accordingly. In short, you put your eggs in different baskets. Mutual funds invest in financial markets whereas REITs of the companies invest in solely real-estates.
You invest your part and people with similar interests as you, invest their part and all of your funds collectively are used to buy a property that will be rented and that rent will be yours to keep.
With the real estate investment in the discussion, you might be wondering why not buy the entire property yourself? Why not invest in the shares of the real estate company? The answer is simple. There are risks and heavy responsibilities involved when you are buying a property yourself. And also, not everyone has enough funds to buy several real estates altogether. When you are buying the shares of a real-estate agency, you are investing in that company’s management and not buying the property yourself. This means you will get dividends on your shares and not the rent and appreciation on your investment.
Let’s understand this with a hypothetical example. Let's say you have ₹ 15 lacs which you want to invest in real estate. With a small sum of money, you will first have to research which area is more likely to prosper in which state, which land will have what use, what will the surroundings be like? Generally, when individuals invest, they would get properties in less prosperous areas due to their capital investment size compared to the billionaires who invest in real estate. So, an individual won’t be able to buy a rich, luxurious property which is more likely to appreciate in the future. But with REITs in the picture, you along with others can get your share in those prosperous properties with comparatively lesser individual investments.
And when you invest in the stocks of a real estate company, you invest in the management. So, you don’t have any right over the company’s real estate investment. This also means the management can do whatever they want with your funds. And if by chance, their decisions turn out to be wrong, you lose your money. But then again, you might be wondering: “isn’t investment all about the game of high risk, high returns?” yes, it indeed is. But REITs are under government supervision and they are bound to invest 80% of the capital in already existing properties which are more likely to appreciate and grow. Moreover, apart from the regular rentals, you can also earn through appreciation of the property.
Why are REITs criticized?
All this explanation makes REITs look like a perfect investment for your portfolio, doesn’t it? However, there is no such thing as a perfect investment. Real Estate is one of the favorite asset classes for Indians to park their savings. To give a context, the average Indian household has more than 80% of its wealth in Real Estate and other physical assets.
However, Investments in Real Estate has always been criticized due to below few reasons:
● Real Estate has been an outlet for people with unaccounted cash
● Lack of diversification – As the ticket size involved to buy a property is very high
● Lack of divisibility – Cannot book partial profits
● A lot of hassles involved
● Liquidity is considered to be a major issue
● People getting stuck with incomplete projects
REITs are criticized for being too sensitive to interest rates. As the interest rates rise, REITs tend to get weak.
Source: fool.com
As shown in the chart, the 10-year Treasury returns tend to be a good REIT indicator. The price and returns have an inverse relationship. This means, when the interest rate is low, the price is low, so the REIT performance will be higher whereas, when the interest rate rises, the price also rises, leading to lower REIT performance.
REITs in India:
The concept of REITs came into the picture almost 60 years ago. But, India came to terms with this concept only in 2019 when the first REIT of Embassy was offered. Soon after Embassy, the REIT of MindSpace came into the market. On day 1 of the IPO, MindSpace received 38% bids. The IPO attracted bids for 19,23,600 units compared with 6,77,46,400 units on the clock.
Embassy Office Parks REIT’s performance:
Source: moneycontrol
MindSpace REIT performance:
Source: moneycontrol
The union budget of India has shown an inclination in urban infrastructure development. FM Sitharaman allocated ₹ 20,000 crore for Infrastructure for the fiscal year 2021-22. Furthermore, the government has increased the capital expenditure from ₹ 4.39 lakh crore last year to ₹ 5.54 lakh crore for FY 2021-22. This is a clear indicator that capital and real-estate development are going to stay in focus for a few years now. Ther REITs and InvITs are the major developing detectors in the stock market and investment industry.
The Brookfield REIT:
The third REITs is now released and it has observed an overwhelming response as it received 7.94 times the required subscription on its final day of bidding. The issue is of ₹ 3800 crore. This response from the public is the indicator that there is a strong future for real estate in India. Though the concept is new, it is now well understood by the investors and its importance.
Why the overwhelming response tho? The answer is simple. The Brookfield company has a quite well-planned plan and the company itself is quite known in the field for quite some time.
The company already has its real-estates in prime cities like Mumbai (9.6 acres), Gurugam (28 acres), Noida (19 acres), and Kolkata (48 acres). All these properties are either given on lease or rent for commercial purposes. The clients of Brookfield are big companies like Barclays, Bank of America, TCS, Cognizant, etc… from this data, we can conclude that the company is well known in this field and has a very profound reputation.
Brookefield is India's first fully professionally managed REIT company. The tenant retention rate of Brookfield is 85% which makes it stable and steady enough for the payment of dividends. It is a company that is even listed on New York Stock Exchange and Toronto Stock Exchange.
Credits: Ticker by finology
This description and facts sound pretty tempting, no? While researching, we almost had the desire to instantly buy the stocks. But, as we mentioned earlier, there is no such thing as “perfect investment”. As the company has numerous existing estates already, the main motive of collecting funds from the public is debt repayment. And the debt is quite huge to be repaid just with this one IPO. So, before investing, go through the possible risk factors and decide for yourself what you have to do.
As the concept of REITs is new in India, there is a high possibility that there are many more companies like Godrej which will launch their REITs soon. Let’s research a bit more about the future and then invest, shouldn’t we?
See you soon. :)
This content piece was prepared by Vidhi.
Comments