In recent years, investors around the world have recognised real estate as an asset class that is an essential part of a diversified portfolio. They see REITs as a cost-effective and efficient way to access investment grade real estate in tandem with professional management. Basically, Real Estate Investments Trusts (REITs) are the entities that invest in revenue-generating real estate assets and sell their units like a stock on the major stock exchanges. With the announcement of tax pass through status for REITs in the recent budget, this wonderful investment instrument is expected to introduce soon in India. According to the draft guidelines, any investor, resident or foreign, can invest in REITs in India. However, initially, until the market develops, it is proposed that the units of the REITs may be offered only to HNIs/institutions. The minimum capital required to invest in REITs would be INR 200,000 as according to SEBI, the minimum unit size is INR 100,000 and one needs to buy at least two units to invest\ in REITs. There are five major reasons why an investor should invest in REITs: returns, diversification, liquidity, transparency and efficiency.
Consistent Income: REITs are required to distribute at least 90 per cent of the net income to the unit holders; thus, they offer an advantage over equity stocks where companies may choose not to pay dividends. The earnings from a real estate asset is generated from long-term appreciation and leases that provide stable returns, while equity earnings vary monthly on the basis of sales, demand, supply and other factors.
Diversification: A REIT has a low correlation with other asset classes, such as equities and bonds. The low correlation is due to the fact that real estate earnings do not behave like corporate earnings. Low correlation provides a better platform for diversification by reducing the volatility of a multi-asset portfolio. Secondly, the investment in REIT gives better diversification within the real estate asset class compared to direct investments that are capital intensive in nature. This provides thee exposure to invest in different micro-markets that are indifferent phases of the real estate cycle.
Easy Exit: REITs are publically traded; therefore provide more advantages in terms of liquidity compared to direct real estate investment. In addition, they have potential for capital gains if the share price of the REIT rises.
Transparency: The listed REITs will be registered and regulated by SEBI, and they will adhere to high governance and information disclosure standards, due to which, the market will provide better transparency and the interest of the investors will be intact.
Professional Management: REITs are professionally managed and have access to a large capital base, which gives investors potential benefits, such as economies of scale, professional market knowledge and access to high value properties. The performance of REITs is monitored on a regular basis by independent directors, analysts, auditors and media, which provide an investor a measure of protection. These benefits are invaluable in cases where a general investor does not have time, money or expertise to manage his property portfolio in such a professional way.
REITs have been adopted worldwide and in some markets, they have become very successful as an investor's look for income-oriented investments putting dividends associated with REITs at the top of the list. The listed real estate and REITs are proved to be efficient and effective investment opportunities due to their transparency and liquidity advantages. SEBI is expected to come up with final guidelines by October 2014. Whether REITs will provide good returns to investors in an Indian context or not, only time will tell, as the feasibility and performance of REITs depend primarily on the market conditions and the regulatory framework governing them. This is one of the key factors that decides and drives the growth of REITs in any given market. Regulatory aspects, in general, constitute the rules related to structure, borrowings, investment & asset acquisition, income & capital distribution, and taxing of REITs. The success of REITs in any country depends on its capability to customise the rules and regulations of REITs in such a way that they fit into their own markets.
About the author
Surabhi Arora, leads the research team in India and has more than 13 years of experience in carrying out multi-disciplinary research and analysis in the area of finance and real estate industry. Surabhi specialises in real estate economics, policies, commercial and residential real estate research with in-depth knowledge of market dynamics across major markets in India.