💎 All you need to know about REITs


Recently while analysing a new client's existing portfolio, I noticed that she had a diverse portfolio of investments, heavy on equity and alternative assets. But, she had no investments in real estate. When I asked her if she would ever be interested in investing in real estate, she promptly said no. She cited 3 hurdles:

  • Huge capital involved,
  • High maintenance costs,
  • And the lack of flexibility

This conversation made me reflect on how much the narrative and approach around real estate have evolved.

Early in my career, my parents insisted I invest in real estate so that I have an asset in my name – they come from that school of thought where physical assets give a sense of security.

But as my client rightly pointed out, younger working professionals face real challenges regarding real estate investing.

High costs being the most prohibitive factor.

Real Estate Investment Trusts or REITs are an option for investors for whom capital is the only constraint.

In this week's edition of Dezerv's Three Point Five, we will dive deep into the world of REITs in India. We'll explore -

  • The real estate market in India
  • How REITs function, and
  • How to choose a REIT to invest in

The state of the real estate market in India

The real estate market in India has seen a significant transformation over the past 5 years.

Property rates have been upward, making real estate a lucrative investment option. However, this rise in property rates has also presented challenges, particularly for the younger generation.

Let's take a look at the city-wise rise in property rates per square foot over the past 5 years:

101 issue-02 city wise avg property price.png

 Millennials, often referred to as the 'rent generation', are finding it increasingly difficult to invest in real estate. The cost of living has been rising steadily, with expenses like education, healthcare, and lifestyle needs taking up a significant portion of income. This, coupled with the high property rates, has made home ownership a distant dream for many.

Real estate investing - a distant dream no more

Real Estate Investment Trust or REIT is an entity that owns, operates, or finances income-generating real estate. REITs offer the general public an opportunity to invest in a diversified portfolio of properties by purchasing shares, much like investing in a mutual fund or a stock without the need for huge capital.

In India, there are primarily 3 types of REITs:

  1. Equity REITs: These REITs own and manage income-producing real estate. They generate income by collecting rent on and from the sale of the properties they own for the long term.

  2. Mortgage REITs: These REITs lend money to real estate owners and operators directly through mortgages and loans or indirectly through acquiring mortgage-backed securities.

  3. Hybrid REITs: These REITs are a combination of equity and mortgage REITs. They both own and operate income-producing properties and engage in lending activities.

Recently, Nexus Properties also introduced India's first retail REIT. Retail REITs invest in commercial properties like shopping malls, complexes etc.

Here's how REITs work:

    101 issue-03 structure of REITs.png

  • Acquisition of properties: REITs raise capital through an Initial Public Offering (IPO). This capital is then used to acquire a diverse range of income-generating properties. These properties range from office buildings and shopping malls to warehouses and apartments.
  • Income generation: The properties owned by the REIT are rented out to tenants. The rent collected from these tenants forms the REIT's primary income source.
  • Distribution of dividends: By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends. This makes REITs a highly attractive investment option for individuals seeking regular income.
  • Capital appreciation: Over time, as the value of the properties owned by the REIT increases, the value of the REIT's shares also increases. This provides investors with the potential for capital appreciation.
  • Minimum investment: The minimum investment amount for REIT is between INR 10,000 to INR 15,000.

How to choose the right REIT?

101 issue-04 How to evaluate REITs.png

Choosing the right REIT requires careful consideration of these factors and a clear understanding of your investment goals and risk tolerance. Here's an initial framework to follow.  

When choosing a REIT, you should consider several factors:

  • Type of properties: The type of properties a REIT invests in can significantly impact its performance. Some REITs invest in a single property type, such as commercial or residential properties, while others have a diversified portfolio.
  • Geographical location: The properties' location can also affect a REIT's performance. Properties in high-growth areas or areas with stable economies tend to generate higher returns.
  • Financial performance: Investors should look at key financial indicators such as the REIT's funds from operations (FFO), return on equity (ROE), and debt-to-equity ratio.
  • Dividend yield: Since REITs must distribute at least 90% of their taxable income to shareholders, investors should consider the REIT's dividend yield, a measure of the annual dividend payment divided by the REIT's market price.
  • Management team: A competent and experienced management team can significantly impact the REIT's performance. Investors should consider the team's track record and strategy for managing and growing the REIT's portfolio.

3 Ways to Invest in REITs in India

  1. Direct Purchase: Buy REIT units directly from the stock exchange like you would buy company shares.

  2. Mutual Funds: Invest in mutual funds with REIT units in their portfolio, offering diversification and professional management.

  3. IPOs: Participate in the Initial Public Offering (IPO) of a REIT, getting in at the ground level of a new real estate investment opportunity.

The future of REITs in India looks promising, with several exciting developments on the horizon. Blackstone, a global private equity giant, plans to launch Asia's largest REIT IPO in India, valued at up to $1 billion.

In another significant development, NSE Indices Ltd, a subsidiary of the National Stock Exchange, has launched India's first-ever Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) Index. This index will track the performance of REITs and InvITs listed on the NSE, providing investors with a benchmark to compare the performance of their investments.

These developments signal a bright future for REITs in India, opening up new avenues for investors and contributing to the growth and maturity of the real estate investment landscape in the country.

However, like any investment, REITs come with their own set of risks and challenges. Therefore, it's crucial to conduct thorough research and consider factors such as the type of properties, geographical location, financial performance, dividend yield, and the management team before making an investment decision.