The real estate industry in India has always been a highly favored asset class for investors due to the capital appreciation and inflation hedging it provides. However, due to the inherent limitations of property ownership, such as a massive investment outlay, a lack of geographic diversification, and tight liquidity, among other factors, a more diversified and secure investment opportunity in the form of real estate investment trusts, or REITs, is being considered for investment.
Since its debut in April 2019, Indian REITs have made it possible for regular investors to invest in the commercial property market. They have evolved as one of the most feasible investment options.
But, firstly, what are REITs?
Most would not have gone for REITs investing a decade or so. But, REITs have grown in appeal among institutional and ordinary investors, especially with the positive prospects surrounding future office space expansion. REITs are the tax-advantaged vehicle that holds income-producing real estate. A REIT gets formed when a sponsor transfers ownership of assets to the trust in return for the trust’s units. Consider it similar to a mutual fund, in which money gets aggregated from investors. In exchange, they get mutual fund units. Instead of stock shares, REIT units signify ownership of the real estate. Dividends and capital appreciation get used to producing profits.
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What exactly are the 3 REITs Listed in India?
In 2019, India saw the launch of its first REIT. India has three REITs and two InvITs listed with SEBI (Infrastructure Investment Trusts). But, there are no upcoming REITs in India in 2022. InvITs are theoretically identical to REITs. REITs own and run office spaces. InvITs also own plus operate infrastructures, such as highways, bridges, dams, and electricity grids, to mention a few examples. The history of REITs and InvITs in India is not too far from the past, indicating that REITs are a recent trend that has swept up the Indian property investment big time.
So, what are these 3 Listed REITs in India? These also happen to be the top REITs in India.
- The Embassy REIT: Embassy REIT, sponsored by Embassy and Blackstone, is Asia’s first and biggest listed REIT (by area). The firm owns and runs 42.4 MSF (million square feet). It owns eight office parks, two hotels, and a 100 MW solar power facility. It has a finished operational area of 32.3 MSF and an occupancy rate of 88.9 percent as of March 31, 2021. Bangalore is their largest market, accounting for 72% of asset value, trailed by Mumbai (11%), and Pune (1%). (10 percent ). The top ten renters provide 39 percent of rental income. WALE (Weighted Average Lease Expiry) for the firm is 7 years. Unlike other REITs, Embassy has hotel exposure in its portfolio (5 percent of its GAV). If business travel stays stagnant, this sector will remain to be a burden on their operations. In FY21, the corporation took a 13% rent increase on 8.4 million square feet across 94 agreements. It will contribute 10-15% to NOI growth.
- Mindspace REIT: K Raheja Corp Group is the sponsor of Mindspace REIT. It offers a diverse portfolio of office premises across Mumbai, Pune, Hyderabad, and Chennai, totaling 30.2 MSF. The top ten renters provide 40.3 percent of rental income. They are now 84.2 percent full. WALE is six years old. In the previous four years, the company’s sales increased by 8.9 percent CAGR to 1629.3 Cr. In FY21, it increased by 5.1 percent. The NAV has risen from 326.1 at the IPO (July 2020) to 345.2 in March 2021. Mindspace has a greater after-tax yield (90 percent of NDCF). Most SPVs get 100% managed by REIT (11 percent possessed by the Government of AP) except for Mindspace Hyderabad.
- Brookfield India REIT: Brookfield India REIT is a newcomer to the market. It is the first institutionally managed commercial property vehicle in India. It gets sponsored by Brookfield AMC. They have offices in Mumbai, Gurugram, Noida, and Kolkata. Their first portfolio is 14.0 million square feet, with the option to buy an additional 8.2 million square feet. The NCR area accounts for 56% of total asset value. The firm has a 91 percent occupancy rate and a WALE of 7 years. The firm is primarily reliant on a small number of clients. Accenture, TCS, and Cognizant are responsible for 49 percent of the leased space. The lease expiration profile of the portfolio is well-spaced. By FY23, the Mark to Market will have increased from 31% to 34%. As of FY21, the NAV per unit is 317/-. The corporation holds a Right of First Offer (ROFO) on certain Brookfield Group assets. These additional assets have the capacity to more than treble the total leasable space to 29.9 million square feet. It also has the potential to raise Net Operating Income (NOI) by 25percent over the next 2-3 years.
Which REIT is the best to invest in?
They are all well-managed trusts with solid balance sheets. They have comparable long-term growth prospects. However, one performs better than the other two.
- The most dividend yield and occupancy rate get held by Brookfield REIT.
- Mindspace REIT provides the maximum tax-free distribution (90 percent). Their LTV is the lowest (14%) among the others.
- Brookfield and Embassy are more concentrated on the NCR (52 percent of GAV) and Bangalore (72 percent of GAV). Mindspace is more diverse throughout the four main cities.
So, should you invest in these listed REITs?
Indian REITs had their inception in April 2019. They have gotten possible for regular investors to do commercial property investments. They have evolved as one of the most feasible investment options, outperforming other financial investment vehicles throughout time. REIT has also surpassed the Realty Index, BSE Sensex, and mutual funds in terms of performance. The Mindspace Business Parks REIT nor the Embassy Office Parks REIT traded below their initial public offering price during the pandemic. The Brookfield India REIT has performed admirably in the previous six months.
The resilience of commercial property in India is a critical component that helps sustain a healthy outlook for REITs. There are roughly 650 mills. sq. feet of high-grade office space in India. 310-320 million square feet is REIT-able stock. The current three REITs encompass 87 mills.sq.feet – Mindspace 31 mill.sq.feet, Embassy 42 mill.sq.feet, and Brookfield 14 mill.sq.feet.
REITs provide double the post-tax returns as term deposits, recurring deposits, government bonds, and other classes.
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But, how do you do REIT investments?
REIT units, like shares, may be purchased using standard trading accounts on the major exchanges, the BSE and NSE. REITs first appeared in the India market in April 2019. Embassy Business Park REIT became the country’s first REIT vehicle to get listed. Public REITs in India registered with SEBI are now in operation in India. REITs, like exchange-traded funds (ETFs), get listed plus traded on stock exchanges; hence, acquiring shares on the stock exchange is one of the ideal ways to invest. As a result, Demat accounts get required for REIT investments in India.
The prices of REIT shares on stock exchanges fluctuate based on both on-demands for units and the performances of the REIT. SEBI announced two important changes to the laws for investing in REITs in India to attract investors. The prior minimum investment requirement of Rs 50k for investors to invest in REIT units has gotten eliminated. For initial public offerings and follow-on offers, the minimum investment amount is currently between Rs.10k to Rs.15k. Another regulatory change is the lot size of REITs exchanged, which is now 100 units. The average lot size has decreased from hundred units to 1 unit as a result of the same SEBI regulation.
A REIT is a terrific place to start if you are an aggressive investor wanting to add commercial properties to your long-term investment portfolio. As the Indian market grows, there may be more REITs available to help you diversify your investments across two or three identical assets.
Assetmonk is a portal that provides real estate investment possibilities in key cities like Bangalore, Chennai, and Hyderabad, with IRRs ranging from 14 to 21 percent.
