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De-mystifying REIT: Real Estate Investment Trust
Real Estate Investment Trusts (REITs) are undoubtedly the safest investment options in the Indian market today. However, you may not see much of it in the residential real estate turf just as yet.
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Essentially, REITs are companies investing in real estate assets, allowing you to invest indirectly in the asset. If such a trust owns and operates any residential rental property like apartment buildings and houses, it is a residential REIT.
So far, the REIT listings in India are rather marginal. However, a report by JLL projects that the market is likely to have a profitable growth curve in 2021. With cities like Bengaluru brimming with REIT assets ($11.16 billion), the upsurge is inevitable.
Still, will the REIT market expand towards the residential real estate sector? Let’s gain some insights.
Looking at Real Estate from the Lens of a Financial Product
When it comes to investing in real estate, the skyrocketing property prices require large capital. Besides, its high volatility due to situations such as COVID-19 and low rental yields are reasons why this seems like a bad idea. But REITs can solve this problem.
As a financial product, REITs are quite similar to mutual funds. These funds invest in bonds and stocks, and the interested investors can further invest in some units of the fund. The unitholders will equally earn the returns and interest generated on this stock/bond investment.
REITs own expensive real estate properties, which they further lease out to reliable tenants. Individuals interested in investing can contact these experts and invest in a few units of this trust. In return, they will receive a whopping 5-7% of the rental yield.
What is Residential REIT, and How Does It Work?
A residential REIT is any real estate investment group that trades, owns, and operates income-producing houses. That is, owning or developing residential property to let others invest.
REITs are of two types – equity and debt. The former refers to owned properties where the returns come through rentals. The latter refers to REITs loaning money for mortgages to real estate owners or buy mortgage-backed securities (MBs).
Like any other REIT, residential REITs also have to follow a set of requirements to qualify.
- Distribute at least 90% of return on investments among the investors
- Invest at least 75% of assets in real estate
- Obtain at least 75% of their gross income from the real estate sector
Investors can purchase shares of qualified REITs and receive returns from their rent or loan interest.
So, while you may not have enough financial aid to purchase a property worth $500,000, you can invest with $5,000.
Investing in residential REITs may seem relatively better than purchasing and selling expensive properties. However, it comes with multiple risk factors, similar to stock investments.
- Interest Rate Fluctuation: Stock price is inversely proportional to yields. While you may enjoy higher yields, the stock prices may actually fall significantly low.
- Housing Market Risk: According to the 2001 housing census, Indian citizens own a whopping 187 million houses. If this rate increases, the demand for rental housing is sure to decline.
- Low Financial Aid: Most REITs expand their business with borrowed money. However, if they cannot pay the debt, the REITs may reduce their return (dividends) or sell their assets.
REITs in India Are More Focused on Commercial
While REIT is an exciting new investment opportunity in India, it is largely dominated by commercial real estate. Currently, REITs comprise shopping malls, office spaces, and retail complexes.
The three major publicly listed REITs have proven advantageous for investors and developers alike. Moreover, the demand for commercial property investments prevails despite the work-from-home culture and other covid-related factors.
Embassy Office Parks
The joint venture of Embassy Group and Blackstone, Embassy Office Parks, debuted as the first REIT in India in 2019. Ever since its onset, the trust has been performing excellently, given the low numbers of REITs in the country. Embassy Office displayed a hike of 3% in revenues over the previous year but bags the 'Outperform' rating despite a 15% slip in the net profit.
Mindspace Business Parks
India's second REIT, Mindspace Business Parks, bagged major global and local brokerage within two months of its introduction in the market. It owns a total of 5 office parks in Mumbai, Hyderabad, Pune, and Chennai. ICICI Securities projects the trust’s income to grow at a CAGR of 16% till 2023.
Brookfield is a relatively new entry into the market, already owning office parks worth 14 million square feet. It has an attractive set of clientele, including Bank of America Continuum, RBS, Accenture, TCS, and Barclays.
Benefits of REITs for Residential Real Estate in India
REITs are among the most beneficial investments, especially in the residential estate of India. That holds true, especially because REITs mostly own and capitalize on profitable properties. Thereby, investors are bound to enjoy a higher ROI.
- Small amount of investment is possible: Through stocks and shares, REITs let you invest in expensive properties even with small investment amounts.
- High rental yield: These funds have a relatively higher rental yield of around 5-7%, more so as REITs only invest in profitable and reliable properties.
- SEBI-managed safer option: REITs follow regulations set by the Security Exchange Board of India and thus offer a safe mode of investment. Additionally, it ensures complete transparency of transactions.
What Does the Future Hold for REIT in the Residential Real Estate Market of India
The promising performance of REITs in the commercial real estate of India indicates its positive potential in the residential sector.
From college students and working individuals living away from home to single and joint families, there are many residential rental properties. These make for over 21.72 million urban houses, according to a 2019 report by Knight Frank and Khaitan & Co. Moreover, these numbers are certainly bound to grow over the coming years.
Besides, REITs seem to be an easier investment option for NRIs as they can invest without visiting the property. The foreign investment further makes for a beneficial factor for Indian residential real estate.
The current and future trends suggest REITs to have a profitable expansion in the Indian residential real estate market in the near future.
Prabhat Kumar Tiwary is a Stanford Business Graduate and is currently the CEO and Founder of YourOwnROOM which is a residential real estate prop-tech rental and property management company with 0.5 M sqft. of Residential assets under management across Bangalore and Pune in India
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.