Everything About Real Estate Investment Trust (REIT) in India

Real Estate Investment Trust in India

Hi, friends.
I have got a lot of questions and requests from people willing to know more about Real Estate Investment Trust (REIT) in India. In this blog, I am going to explain in detail what exactly is REIT. I will also get into its benefits to the common public and investors.

Lets begin.

The real estate sector is one of the most recognised sectors in the world.

As we all know, the real estate business is basically the property business. It consists of building on the land, whether it be residential buildings, commercial towers, apartments, offices, IT-Park or a parking lot. The real estate business includes the purchase, sale or rental of land, buildings or housing.

DID YOU KNOW?

In India, the second-largest employer after agriculture is Real estate. It is expected to grow 30 per cent over the next decade.”

Indian Brand Equity Foundation

What is Real Estate Investment Trusts (REIT)

The Government and Securities and Exchange Board of India through various notifications is facilitating investment in real estate in India directly and indirectly through foreign direct investment, through listed real estate companies and mutual funds. One of the ways to tap the potential in the Real estate sector is Real Estate Investment Trusts.

Real Estate Investment Trust (“REIT”) are very similar to mutual funds.

Just like we put money in mutual funds and that particular mutual fund inturn invests in the stock market.

Real estate Investment Trust Flow
REIT Flow

Similarly, in an REIT we do not have to purchase a real estate but we can invest in a REIT. Inturn, the REIT will take care of the rest. The particular REIT will invest in the real estate assets. They will share with you the dividends that they receive.

REITs essentially facilitate investments in the real estate sector.

It is primarily for people who are not looking to buy a property. It is only for people looking to invest in the real estate market and have a fair share of returns/ profits. This is for people who want to take benefits of the growing real estate market in the country.

It is a very good option for many people who do not have the funds to invest in or buy whole properties. The requirement to invest in REIT is pretty less. One can invest in REITs with only Rs 2 lakhs.

REITs can mainly invest in commercial real estate in two ways

  • Directly; and
  • through a special purpose vehicle (“SPV”) 

Indian REITs (specific/generic version I-REIT) will help individual investors take advantage of having an interest in the securitized real estate market

Basic REIT Ecosystem

Real estate Investment Trust Ecosystem
REIT Ecosystem

Step 1 – REITs Generate Investments

The REITs may generate investments from one, two or all of the following

  • Private Investors
  • Institutional Investors
  • Companies

Step 2: REIT invests in Commercial Real Estate Spaces

Once the investment is received by the REIT, it looks for premium investment opportunities with good prospects. These can be malls, IT spaces, Commercial establishments, Hotel etc.

Step 3: REIT Receives Capital From Rent, Investments or Selling

The REIT receives payments either in the form of rent or by selling a property.

Step 4: Profits Returned To Investors

The profits is received either by acquiring rent, selling of properties. It is then given back to the investors in the form of dividends.

Types of REIT in India

  1. Equity REITs – Equity REITs essentially make money from rent. The landlord gives spaces like shopping malls, large office spaces, massive residential townships to tenants on the lease. The earned rental income is then distributed among the REIT investors in the form of dividends.
  1. Mortgage REITs – Here, there is no concept of an owner. The REIT does not invest in real estate spaced directly. But it acts as an investor and provides capital through debt for the development of real estate projects. Mortgage REITs earn income in the form of EMIs/ interests which are then distributed among REIT investors in the form of dividends.
  2. Hybrid REITs – As the name suggests, this is the combination of the equity REITs and the Mortgage REITs.

REITs in India – Highlights

Read: Sebi amends norms for REITs, InvITs to make them more attractive

  • In Budget 2014, Finance Minister Arun Jaitley introduced legislation for the establishment of REIT. In August 2014, India approved the creation of real estate investment trusts in the country (not a company or LLP) Read Why?
  • They are compulsory to be registered with SEBI and will be traded on the stock exchange. Eg. Bombay Stock Exchange, National Stock Exchange.
  • At least 80% of the Total Asset Value should be invested in Completed or Rent generating Assets, with a lock-in period of 3 years.
  • Maximum 20% of Total Asset Value can be from
    • Under Construction properties with a lock-in period of 3 years post-completion. 10% only in Under Construction.
    • Listed or Unlisted debt of Real Estate Companies
    • Mortgage-Backed Securities
    • Stocks of listed Real estate Companies in India, generating atleast 75% of their income from Real estate Business.
    • Unutilized FSI and TDR
    • Government Securities
    • Cash or Money Markets

Curious Reads: Three REIT Sectors Vital to the E-commerce Ecosystem

  • Cannot invest in vacant land (until the land is linked to a project) or agricultural land
  • At least 75% of revenues should come from rentals only
  • Investments in other REITs not permitted
  • Dividends
    • Minimum 90% of net distributable cash flow of REIT has to be provided in dividends
    • At least 90% of the sale proceeds(income from the sale of an asset) have to be distributed as dividends until and unless there is a reinvestment proposal.
    • Distribution every 6 months
  • Public Offer
    • Total Asset Value of REIT should be greater Rs 500 cr
    • Minimum Public Float – 25%
    • Minimum offer size – Rs 250 cr
    • Minimum Subscription amount – Rs 2 lakhs per applicant
    • Trading Lot
      • REITs can be traded with an investment cap of Rs. 1 Lakh

What are the advantages of investing in REITs?

Some of the visible benefits of an REIT are as follows:-

  • Low entry point & High Liquidity
    • Just like mutual funds, you can buy and sell units at will. Min investment – Rs 2 lakhs
    • The convenience of buying REITs should not be underestimated.
    • REITs can be bought as stocks instead of the hassle of buying real estate and dealing with the different types of legalities that come linked with it.
  • High Liquidity
    • The biggest benefit of REITs is the quick and easy liquidation of investments in the real estate market unlike the traditional way of disposing of real estate.
  • Security & Minimum Risk
    • Income is guaranteed by long leases
    • REITs mainly generate income in the form of rents
    • 80% of the money is invested in income-producing properties
    • Rental income from the beginning of time is considered a very secure type of income.

“Investment in commercial real estate is a highly capital-intensive affair. REITs are a very viable addition to investment portfolios as they allow investors to participate in an asset class previously reserved only for the affluent few”

  • Portfolio Diversification
    • Not as volatile as stock markets
    • REITs invest in various different kinds of Real Estate assets across cities across different kinds of spaces.
  • Professional management
    • Professional Companies manage the portfolios with proper market research.
    • Tenant finding and management is a hassle
  • Transparency
    • Securities and Exchange Board of India(SEBI) govern REITs (Real Estate Investment Trusts Regulations, 2014)”
    • You get information into average rent, buying selling rates, occupancy levels, etc
  • Higher Dividend and Stable Returns
    • We cannot forget the returns generated by the REITs for its shareholders.
    • On average, REITs can produce almost 10% stable returns per year for its shareholders.

Structure of REITs

REIT Structure
REIT Structure
  • REITs can be established in trust under the Indian Trust Act 1882 and are registered with SEBI. (Registration party link) Like a mutual fund, it has three parts:
    • Trustee -He generally oversees the activities of the REITs. He is believed to be a registered debenture trustee who is in no way associated with the sponsor;
    • Sponsor – they hold at least 25% in REITs for 3 years and 15% after that. Their main responsibility is to create the REIT and to appoint the trustee; And
    • Manager – who is a company or a corporate company that manages and operates the REIT. A manager must have at least 5 years of related experience as well as other requirements as notified.

Difference Between REITs and INvITs

INvITs (infrastructure investment trusts) can be described somewhat similarly to REITs, where people pool in small amounts of money in the same way as in a mutual fund.

InvITs have been introduced to enable investment in the infrastructure sector. SEBI notified the Infrastructure Investment Trust Regulations in 2014 for the registration and regulation of InvITs in India.

The INvITs are a modified version of the REITs which are designed to adapt to the specific circumstances in India. The main difference is that REITs invest in Real Estate whereas INvITs invest in Infrastructure projects in India like Roads, Public health, Water supply, Transmission Lines etc

How does a company qualify as a REIT?

To be eligible for REITs, a business must:

  • Invest at least 75% of its total assets in real estate
  • Get at least 75% of your gross income from real estate rents, interest on mortgages financing real estate or real estate sales
  • Pay at least 90% of its taxable income in the form of dividends to shareholders each year
  • Be a taxable entity as a corporation
  • Be managed by a board of directors or a trustee
  • Have a minimum of 100 shareholders
  • Have no more than 50% of its shares owned by five or fewer people

How can I invest In REIT in India?

Real Estate Investment Trusts (REITs) in India are right now at a very nascent stage with only one IPO having been released till now. You will have to make a Demat account linked to the bank account.

The first REIT initial public offering (IPO) by Embassy Office Parks, a Bangalore-based real estate developer backed by Blackstone Group LP, a global private equity firm) was launched on 18-Mar’19. Shares of Indian REIT started trading from 01st April’19 in Bombay Stock Exchange.

Embassy Office Parks REIT Ltd.

You can get a detailed guide here

Conclusion 

Real estate as an asset class has always attracted investors, but the high ticket size made it out of reach for many. Investing in grade A office space or prime real estate location is out of the question even for many wealthy individuals. But REITs can provide an option to the retail investors to invest in high-end commercial real estate, as the minimum investment has been kept very low

Several international institutional investors have shown a keen interest in the country’s real estate market. They see REIT and INvIT as a type of opportunity to take advantage of India’s growing growth in this sector. REIT and INvIT are a good idea for these institutional investors to diversify their investments in India. Strong governance protocols established by SEBI, as well as laws such as RERA that protect clients in general, are believed to help transform the real estate investment space.

We will go into strategies to investing in sustainable REITs later. i will also share with you some business case studies also.

According to Lasalle Investment Managers, India’s real estate is now the 13th largest real estate market in the world by asset value and worth more than $ 1 trillion. Only time will tell how attractive these investments will be in the future.

If you have any questions. Feel free to put your questions in comments.

Further Readings: How To Analyze REITS – Case Study: RioCan

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