Commercial real estate as an asset class has been out of reach of an average Indian investor.
Let’s be honest. Many of us aspire to own and rent out commercial properties in the most prestigious localities.
Real estate investment trusts or REITs have made this fantasy a reality for many investors.
A REIT is an entity that pools in resources from various investors and then collectively invests in real estate to earn capital appreciation and dividends.
This investment vehicle buys, sells and manages real estate on behalf of investors.
REITs allow you to invest a small amount of your savings in real estate that would not have been possible otherwise.
All this is done in a hassle free and convenient manner without indulging in the lengthy process of owning a property.
Simply put, REITs are to real estate what mutual funds are to the equity market. They are publicly traded like common shares on stock exchanges.
The first REIT in India was listed back in April 2019. So why are we talking about REITs now, after almost three years?
Well, in the current market scenario when inflation in the US is at a 40-year high (stock markets do not like high inflation), REITs have emerged as a new investment avenue.
It is becoming increasingly difficult for an investor to locate a high-yielding asset class to invest in. That’s where REITs come in. They can inflation proof your portfolio.
Many people are telling this to be the subject of investment for 2022 and it is also right.
Let’s understand why experts are pushing for REITs…
• Fixed payments
Inflation has been muted in recent years. But now, inflation is back big time. So, you need a hedge.
While we do have gold and other investment options in a rising inflationary environment, here’s how investing in REITs helps beat inflation.
As inflation rises, property prices and rental income rise. In fact, one who has purchased a property using a fixed interest rate loan may benefit during times of high inflation. This supports the REIT’s dividend growth and provides a reliable flow of income even during inflation.
REITs are required to distribute less than 90% of their net distributable cash flow to unit holders in each financial year. This makes them very attractive to those who are looking for regular income.
So REITs have a checkmark in terms of stable payments.
• Portfolio Diversification
When a high-risk asset like a stock is performing well, a low-risk asset like gold usually won’t. When stocks are down, gold is usually stable or up.
In the same way, real estate is largely driven by almost entirely different factors than the factors that drive stock prices.
That’s why you need REITs in your portfolio. It offers the advantage of diversifying your portfolio and participating in the property market. That too without any hassles and with minimum investment.
Budget 2022 has already set the ground for a massive capital expenditure spurt. The focus is clearly shifting to growth at the expense of inflation.
REITs will help you capitalize on the capex boom.
Apart from this, the demand for real estate is also gaining momentum. A survey showed that nearly 75% of the wealthy would like to buy luxury properties worth more than Rs 50 million in the next two years in major cities as well as in holiday destinations.
It is for the rich. But what about affordable housing?
Well, the growth of affordable housing is likely to be strong in the next few years as around 22% of the population still does not have enough housing.
With the situation improving gradually, there has already been a change in sentiment for the real estate sector.
Through portfolio diversification, REITs can take advantage of the real estate boom.
• Reopening the economy is good for REITs
Initially, REITs became very popular because of the dividend yield they offer.
However, since the pandemic, REITs listed on the Indian stock exchanges started underperforming the Sensex widely. This was due to the growing popularity of work from home. There was uncertainty about the future demand for office space.
But now companies have called their employees back to the office and the situation is getting back to normal. This bodes well for REITs and makes them an attractive asset class to invest in.
Overview of Listed REITs in India
In India, there are currently three listed REITs – Embassy Office Park REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust REIT.
Let’s take a look at each…
#1 Embassy Office Park REIT
Embassy REIT is India’s first publicly listed REIT.
It has eight high-quality office parks and four major city center office buildings with 33.6 million square feet (MSF) of full leasable area.
It also has a 9 MSF under construction and development pipeline.
Apart from offices, it also has two operational hotels with 477 keys, an under construction hotel with 619 keys and a 100 MW solar park.
The company is backed by the Blackstone Group, which has been actively investing in the Indian real estate market since 2010.
For the quarter ended December 2021, Embassy REIT declared a payout of Rs 4.9 billion or Rs 5.20 per unit. For FY 2022, Embassy REITs have now announced a cumulative disbursement of Rs 15.6 billion or Rs 16.50 per unit. In FY21, it had declared a cumulative distribution of Rs 21.48 per unit of Rs 18.4 billion in total.
The quarter under review turned out to be a good one for Embassy REIT, where it saw rental collections of over 99% as compared to last year.
The IPO price of the REIT was Rs 300. Since its listing in early April 2019, the stock has gained 24% to Rs 388 as of Monday’s close.
For 2022, the company has raised its guidance and will announce Rs 21.70 per unit despite the Omicron wave affecting some segments marginally.
This would result in a dividend of 5.7 per cent at the current price.
Another key metric that investors need to consider is the book value of a REIT. Just like mutual funds declare their Net Asset Value (NAV) on a daily basis, REITs declare their NAV semi-annually or annually.
That’s why it is important to check whether the REIT is trading at a discount or at a premium to its book value.
Embassy REIT is currently trading at a discount of 2% on its book value of Rs 388.26 till March 2021.
#2 Mindspace Business Park REIT
Mindspace REIT was the second REIT to be listed on Indian exchanges. It is managed by K Raheja Corp Investment Managers.
In the most recent quarter, Mindspace Business Parks REIT leased 1.8 m sq ft of office space, taking its total leasing for the first nine months of the financial year to approximately 4 m sq ft.
It announced a distribution of Rs 2.8 billion, or Rs 4.64 per unit, for the December 2021 quarter, most of which is tax-free. In the September 2021 quarter, it had announced a distribution of Rs 2.7 billion or Rs 4.60 per unit.
The cumulative distribution to the unit holders in the financial year 2021 was 9.59 per unit.
Mindspace IPO offer price was Rs 275 per unit. It has increased by 19% since listing in early August 2020. Its units are currently trading at Rs 358.
Mindspace REIT offers a dividend yield of 5.2%, while it is currently trading at a premium of 4% to its book value of Rs 345.2 as of March 2021.
#3 Brookfield India REIT
The last person to join the party was Brookfield India REIT.
Brookfield India Real Estate Trust REIT is an India based commercial real estate vehicle. The investment trust’s portfolio includes campus-format office parks. Its commercial properties are located in Mumbai, Gurgaon, Noida and Kolkata.
For the quarter ended December 2021, Brookfield REIT announced Rs 5 per unit in dividend to unitholders on the back of strong leasing momentum. It leased 5.36 lakh sq ft of office space in its property with additional expansion options of 2.91 lakh sq ft during the quarter.
The recent payment takes the cumulative dividend distribution for FY 2022 to Rs 17 per unit.
The units were offered at Rs 275 per share. At present, their business is at Rs 311.
Of the three, Brookfield REITs have the highest dividend yield at 6.5% and also the highest occupancy rates.
It is currently trading at a discount of 3% to its book value of Rs 317 till March 2021.
As can be seen, listed REITs are offering good dividend returns through quarterly distributions that are cumulatively over 6% at their current prices.
An important point to note here is that the 3 listed REITs in India deal with ‘A’ grade office space and boast of quality properties leased to the best companies across the world. That’s why even in the pandemic, his collection was around 99%.
According to Anarock, a leading real estate services company, the leasing activity has picked up pace and is already witnessing growth. All the three REITs have declared their results for the quarter which indicate a positive trend.
Surely, now you’ll be excited to take a closer look at REITs and diversify your portfolio. But there are a few things to keep in mind before investing.
The main purpose of REITs is to generate income and not to earn capital gains. REITs have to provide a source of income in the form of rent/interest and leave some room for capital growth.
So if you are investing in REITs, you need to understand their income generating potential for a given period. You have to check the stability of their cash flow.
For example, if a REIT does not see optimal occupancy after the pandemic or loses its negotiating power with customers, it will earn a less distributable surplus.
Now comes an important point: taxes on dividend payments declared by REITs.
Dividends earned from REITs are included in your total taxable income and taxed as per the slab applicable to you.
But that is not always the case.
For example, Mindspace REITs distribute over 90% of payouts in the form of tax-free dividends. The other two – Embassy and Brookfield – are still working on improving these measures. Brookfield’s latest Rs 5 per unit payment allowed only 34% to be tax-free.
To conclude, REITs are catching on big time which is proving to be good for the real estate sector.
The performance of listed REITs has opened doors for real estate companies to come out with their own REITs. Going forward, we may launch more REITs in India.
Developers like Oberoi Realty, DLF, Prestige Estates and Phoenix Mills, who have large commercial property assets, can come out with their own REITs.
As we discussed above, three listed REITs in India deal with ‘A’ grade office space and boast of quality assets. They have the best tenants.
But this may change in the future as more REITs are launched. So always stick to the highest rated REITs.
As more REITs list over time, more options will be available to investors. Either way, this is a space that retail investors need to track in 2022.
This asset class can be a safe way to beat inflation.
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
(This article is syndicated from Equitymaster.com)
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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