REITs — Making real estate more accessible to investors

Real Estate is one of the most popular investments, especially in India. Any Indian elderly family member that you ask, will always push you to buy and invest in property as it is supposedly considered safe and secure. They will cite old statistics about how beneficial it is to have an asset that provides regular rental income as well as price appreciation over time.

However, real estate investments have 2 large drawbacks — the initial investment amount, while investing in a property, is very high. Moreover, real estate is illiquid — it’s hard to sell the property quickly, even more so at the right price.

Then came about a financial instrument, addressing exactly these issues, while also appreciating the importance of having real estate as part of your portfolio. They’re called Real Estate Investment Trust (REIT).

What are REITs?

REITs are companies that own and operate income-generating real estate. Basically, these trusts pool in money from different avenues — like institutional investors, retail investors (individuals like you and me), endowment funds, mutual funds, etc and then use this money to invest in properties. These properties are rented out — hence they’re called income-generating real estate. And the rents are distributed to the investors (also called unit-holders) in the form of dividends. So if you own 1% of the shares of the REIT, you will be eligible to get 1% of the total distributions to the shareholders — intuitive right?

How do REIT investors make money?

REIT investors make money in 2 broad ways…

First — dividends. The money that a REIT generates in the form of rent after deducting expenses — also called Net Distributable Cash Flows (NDCF) is the money that is leftover for the REIT to distribute to its unit-holders. By law, a REIT is required to distribute at least 90% of the NDFC to its unit-holders at least twice a year.

The second, capital appreciation. Just like stocks, REITs are also listed on the stock exchange with constantly changing prices. Moreover, the procedure to invest in a REIT is exactly the same as investing in stocks — through a brokerage + demat account. So, just like how the price of stocks rise/fall over time, the units of the REIT also appreciate/depreciate in value. Since unit-holders indirectly own a portion of the property that REITs buy, the investments grow in tandem with the value of the properties that the REIT holds.

So, REITs give us the best of both worlds — fixed income in the form of dividends (just like how you get fixed interest on loans) as well as scope for capital gains (as in the case with normal equity shares of companies that grow over time).

Advantages of REITs — in a nutshell

REITs in India — and what is changing

India became the 31st country in the world to enact REIT legislation following action by the SEBI in 2014. However, India’s first REIT was launched as recently as 2019. It was a joint venture between Bangalore-based real estate developer Embassy Group and the US-based private equity giant Blackstone (the 2 firms are the sponsors of the REIT). Together, they formed the Embassy Office Parks REIT which raised close to ₹4,750 crores from its IPO. After that, 2 other REITs have gone on to list on the exchange — The Mindspace Business Parks REIT and the Brookfield India Real Estate Trust REIT.

Globally, especially in developed markets, REIT trading is exactly like equity share trading where investors enjoy the ability to buy even a single unit/share of a security.

However, since the Indian REIT market was not developed, regulators had to keep a minimum lot size and a minimum application amount for investors while they would buy units of REITs. The lot size refers to the minimum number of units of a REIT that one must seek to buy in order to be an eligible investor in the REIT. Until recently, the minimum lot size for REITs was 200, which means that an investor had to buy a minimum of 200 units of a REIT if they were interested in buying the REIT in the first place.

As for the minimum application amount, the term refers to the minimum amount of money an investor has to invest when the REIT is going to have an IPO. Till now, investors would have to invest a minimum of ₹50,000 in order to be eligible to invest.

REITs are becoming more accessible now

SEBIs most recent regulations for REITs are changing that. Working towards making REIT investing akin to stock investing, and in line with global best practices, the 2 changes brought about are as follows:

• The minimum trading lot size for REITs have been reduced to 1 unit, from the previous 200.
• The minimum application value for REITs has been reduced from the previous ₹50,000 to a range of ₹10,000–15,000.

These new regulations are going to give the much-needed push for the REIT and the broad real estate market in India. The initial minimum trading lot size and application amount were still high for most small retail investors and hence they were being denied an efficient way of owning commercial real estate as part of their portfolio.

This move is expected to give the much-needed impetus to the REIT market as it makes it more accessible to all investors — big and small. Moreover, it will give a liquidity boost to the market, which might incentivise other real estate developers to enter the REIT business model as well.

REITs have been largely left out from being a part of professionally managed smallcases because of liquidity concerns. The most recent SEBI move hopes to increase liquidity and this might lead them to be part of some asset allocation smallcases.

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