Real Estate Investment Trust: Investment Tool

Posted On - 9 June, 2023 • By - Sudhaman

A Real Estate Investment Trust (REIT) is an investment vehicle that provides retail investors with proportionate ownership of an income-generating real estate asset. Historically, investors in India have invested in real estate by purchasing property or land through real estate developers and property brokers. In such cases, investors had to rely on the property’s long-term market value appreciation to earn a return on investment. This, however, was only achievable if real estate markets were on the rise.

Developers also had to fund projects with loans from banks, private equity groups, and so on, which normally meant hefty interest rates. The Securities and Exchange Board of India (SEBI) brought REITs into the Indian market in 2007. The Security and Exchange Board of India (SEBI) issued preliminary rules in 2008 that permitted investors to recognise REITs as an asset class. The goal was to make it simpler for international investors to invest in the Indian real estate market while also making money more accessible to local developers. Investing can be done in a variety of ways.

  1. Investing in Stock Exchanges

REITs, like ETFs, are listed and traded on stock markets. Thus, as long as an investor has a Demat Account, purchasing REIT units is simple. The price of a REIT unit might fluctuate depending on demand on stock exchanges. The performance of the REIT also has an impact on prices. There are currently three possibilities. Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust are three REITs in India.

  • Investing in Mutual Funds

In India, very few domestic mutual funds engage in REITs, and real estate exposure is very low. Mutual funds can also be used to invest in REITs. Investors in India seeking exposure to overseas real estate can participate in the Kotak Overseas REIT Fund of Fund, which primarily invests in International REITs.

  • Investing in Initial Public Offerings (IPOs)

Investors can keep an eye out for REIT IPOs and invest in them when they become available. This necessitates extensive investigation and comprehension of all REIT risk elements. Because the Indian REIT sector is still developing and there are few REIT possibilities, investors must now wait for the next IPO to be announced.

Essentials to be a REIT

  • Must distribute 90% of income to investors as dividends;
  • At least 80% of investments must be in income-generating properties;
  • No more than 10% of investments can be in properties under construction;
  • Must have a minimum asset base of Rs 500 crores; and
  • NAVs must be updated twice a year.

Various REITs listed are:

  • Embassy Office Parks REIT (Embassy), supported by Blackstone Group, launched India’s first REIT in April 2019.
  • Mindspace REIT’s initial public offering (IPO) in June 2020 was oversubscribed 12.96 times.
  • Until early 2022, the two main listed REITs in India were Embassy and Mindspace. These were trading at a 10%-20% premium to their respective listing prices. This is in addition to the periodic interest payments, which give 6%-7.5% post-tax returns.
  • Brookfield India Real Estate Trust’s Rs. 3,800 crore REIT issuance was also launched in 2022.

Recently, DLF CEO Ashok Tyagi has indicated that the company will not make a Real Estate Investment Trust public offering in the next 12 months.

The majority of DLF’s rental assets (offices and shopping malls) are held by the joint venture entity DLF Cyber City Developers Ltd (DCCDL). DLF owns 66.67% of DCCDL, while GIC, the Singapore sovereign wealth fund, owns 33.33 percent. DCCDL has spent the previous two years completing all of the necessary preparations to list its Real Estate Investment Trust (REIT) on stock exchanges through an Initial Public Offering (IPO).

The decision comes in the midst of global uncertainty and a high-interest-rate regime.  The current high-interest rate scenario, as well as the overall uncertainty, is certainly not the best time for a new REIT,” DLF’s arm DCCDL has become REIT-ready and will wait for favourable market conditions to launch the public offering.