The Complete Guide To REITs In India And How To Invest In REITs

One look at India’s investment universe and a number of names pop up from mutual funds to fixed deposits and gold coins to the share market, there are a plethora of avenues to park your money.

However, one name that has recently caught the fancy of many is REIT.

In this article, we take a detailed look at this relatively new investment phenomenon and why it stands out and is, by all means, a much safer investment platform for Indian investors.

What is REIT?

Most of us dream of buying properties across prime locales in India like BKC in Mumbai to earn great rental yields. However in reality, neither do we have crores of rupees to invest in them nor do we have the time, patience, and means to take on the hassle of maintaining it and ensuring regular rents from the tenants.

Enter REIT or Real Estate Investment Trust, which is basically an entity created with the sole purpose of channeling investible funds into operating, owning, or financing income-producing real estate. 

REITs are modeled on the lines of mutual funds and empower investors to get a stake in real estate and earn through rental yields and capital appreciation of the properties they park their money into. The best part that makes REITs a win-win for all is that one doesn’t need to have crores of rupees to invest. REITs can enlist themselves on a stock exchange. 

How investing in REITs differ from actually buying a property?

Though they are based on real estate, REITs are nothing like traditional property ownership. A REIT is much like a specialized mutual fund that may invest in any of a wide variety of companies that build, own, and manage commercial real estate.

Where did REITs originate?

Back in 1960, the very first REIT came to life in the USA under the Cigar Excise Tax Extension Act. Five years later, REIT was listed on the New York Stock Exchange. In the years that followed, REITs started getting listed on the stock exchanges in several European countries, Japan and Australia. 

REITs in India

REITs entered India relatively later than most countries. Securities and Exchange Board of India (Sebi) introduced them in our country in the year 2007.

However, since back then only draft regulations were put in place, they caused certain limitations and the idea never took a practical implementation. Six years later, SEBI revised its REIT regulations, which ultimately got greenlighted the next year on September 26, 2014. Unlike other countries where REITs consist of residential and commercial real estate, only commercial real estate REITs are allowed in India for now.

The role of WALE

WALE stands for Weighted Average Lease Expiry. It is a measure used to determine the chances of a property becoming empty. Experts believe that any REIT which has 5+ years showing as WALE makes up for the safest investments with fruitful returns.

How Does a Company Qualify as a REIT in India?

In order to qualify as a REIT in India, SEBI has listed the following guidelines. It will constantly keep amending its guidelines to enrich the REITs experience further.

a.The company has to have assets worth a minimum of Rs. 500 crores.

b. For an asset to qualify as SPV (Special Purpose Vehicle), REIT will hold controlling interest and at least 50 percent of the total nominal value of equity in that SPV.

c. 80 percent of the investment must be made in income-generating ready assets (commercial real estate, malls, etc) and only 20 percent of the total investment can be made in under-construction assets.

d. Reduction in trading lot size from Rs 1 lakh to Rs 50,000. SEBI might slash the minimal amount from Rs 50,000 to something lower for retail investors.  

e. Promoters owning 25% of voting rights are allowed to increase their stake by up to 10%, against 5% previously.

f. Recently, SEBI announced that the minimum investment has been reduced to 200 units from the previous 800 units.

SEBI has also laid down a few restrictions for Indian REITs

1) Indian REITs can’t invest in vacant land, agricultural land, or mortgages other than mortgage-backed securities and foreign assets.

2) It is mandatory for them to distribute a minimum of 90% of their taxable income annually in the form of interest/dividend to their unitholders. What that means is if their taxable annual income is Rs 100, they will have to give out Rs 90 to the investors.

How can one invest in REITs?

Individuals can invest in REITs in a variety of different ways, including purchasing shares of publicly traded REIT stocks, mutual funds, and exchange-traded funds. It is essential to check the occupancy level of the commercial real estate properties of the REITs before making an investment.

The procedure:

It is compulsory for REIT investors to have a DEMAT account which should be linked to a bank account.

Investors can choose the required IPO from the range of options available in net banking.

Fill the form and mention the DEMAT account number and code number.

Choose the exchange- NSE or BSE. The price band is Rs 299–300 and you need to bid a minimum of 800 units and in multiples of 400 units thereafter.

That means you need to invest at least Rs 2.4 lakh minimum in the trust.    

Portfolio of investors

One should check and verify details of the promoter, the credentials of the developer, which companies have leased the property.

Taxes on REIT

The dividends earned by investors are subject to taxation. If the SPV has opted to be taxed at the concessional corporate tax rate of 22% (against the general rates of 25%/30%), the dividends declared by the SPV will be taxable in the hands of the unitholders and the business trust would be required to withhold tax at the rate of 10% when distributing income representing dividends received from SPVs. 

If the SPV has not opted for the concessional corporate tax rate and choose 30% tax, then dividends would be exempt from taxation.  The objective seems to be extending one benefit – either exempt dividends or concessional corporate tax rate at the SPV level. 

Investors in REITs also need to know that if they plan to sell their unit or units within just 3 years of investment then they need to shell out 15% tax payments. However, post the 3-year mark, the tax fee reduces to 10%.  

Tips for a good REIT investment experience:

Before investing in any particular REIT, investors should look for corporations that have a positive record when it comes to offering high dividend yields. It is also important to study the developer’s role in providing capital appreciation.

Other tips include:

– Investors can diversify their investment portfolio by purchasing shares through stock exchanges without the need to stay invested for the long term.

– Investors should park funds into REITs that hold diverse properties and tenants.

– They should opt for ETFs and mutual fund options that invest in REITs. Since these funds come with professional assistance; investors would be able to manage them more proficiently.

– Opting for companies that have been active in the field for several years and have an experienced core team would prove more beneficial.

Advantages and disadvantages of REITs

Just like any other investment tool, REITs come with a host of plus points and minus points.

Advantages of REITs:

• REIT is regulated by SEBI and this is why it has the following advantages:
• One doesn’t need to be super-rich to invest in REITs in India.
• It is known to yield excellent ROI.
• Since REITs primarily are for projects which are already built, it is definitely a safe investment.
• Literally, nothing is hidden from investors and everything is laid out in a very transparent manner.

Disadvantages of REITs:

• One thing to remember is that like equities, real estate markets will also rise and fall, and if they fall they will impact the net yield of investors.
• Unlike mutual funds where one can invest a few hundred rupees, REITs call for a minimum of Rs. 50,000 for a 3-year lock-in period.
• Due to the large ticket size, even in times where the market is doing well, investors might find it difficult to sell and exit.
• If lease contracts are not renewed, then it will have a direct impact on the dividends received by the investors.

REIT vs direct property buying 

With a direct real estate investment, you buy a specific property or a stake in one, such as an apartment complex (residential) or a shopping center (commercial). Direct real estate investors make money through rental income, appreciation, and profits generated from any business activities that depend on the real estate.

REITs make sense for investors who don’t want to operate and manage real estate, as well as for those who don’t have the money or can’t get the financing to buy real estate. REITs are also a good way for beginner real estate investors to gain some experience with the industry.

REIT vs Realty Company Shares

There is a slight difference between REIT and real estate company shares. When one buys a real estate company’s shares, how it works is that the company’s planning is decided by its management and it is free to choose wherever it invests.

It can buy residential, commercial, or retail properties or invest in a piece of land and not do any work on it for an extended period of time. In short, the rise and fall of the value of the shares you’ve bought will be directly dependent on how the company operates.

When a company earns a profit, it is obvious that it will reinvest its returns back into the market and then if it incurs a loss, the shareholder will end up losing the money invested. This will cause an execution risk for the investor. On the other hand, REITs come packed with many regulations by SEBI as listed above. Here you will get a rental dividend twice a year. This ensures that your investment is parked much safely.

REITs vs fixed deposits

In comparison to FD, you get good returns on REITs. Also, fixed deposits have longer waiting periods than REITs for dividends. It can take a minimum of 3-10 years for an FD to give the desired returns to an investor.

How much rental yield and capital appreciation can be expected in REITs?

According to industry estimates, the rental yield from a commercial property is in the range of 7-9%, while the capital appreciation can be expected to be between 5-7% over the long term. 

According to industry reports, from its establishment in April 2019 to June 2020, Embassy REIT has outperformed the BSE realty index and has given 14 percent returns. 

Market arbitrage impact on REITs 

In times when there is uncertainty hovering in the commercial real estate market, as was experienced when the Covid-19 pandemic hit us followed by a lockdown, if one buys a unit at such a time it results in an arbitrage opportunity.

A unit costing Rs 500 might reduce its price to Rs 300 and one can buy it at a price much lower than its original value. To enjoy this, one must have a seasoned understanding of the real estate dynamics.

Mindspace Businesspark REIT VS Embassy REIT 

These are the only two REITs of India at the moment. Mindspace Business Park REIT launched its three-day initial public offering on July 27 to raise up to Rs 4,500 crore as it looks to pare debt and monetize its assets.

The IPO is backed by Blackstone Group and the property developer K Raheja. In April 2019, Embassy Office Parks, backed by Blackstone, had raised nearly Rs 4,750 crore. Let us take a look at their key differences.