Real Estate Investment Trusts (REITs) are likely to get a big boost in India with the Securities and Exchange Board of India (SEBI) revising the minimum subscription requirement as well as trading lots for publicly issued REITs and Infrastructure Investment Trusts (InvITs).
SEBI has now brought down the minimum application value for both REITs and InvITs to within the range of Rs 10,000-15,000, compared with the earlier requirement of Rs 50,000 for REITs and Rs 1 lakh for InvITs. Furthermore, the revised trading lot is also now only one unit.
A REIT is essentially a company that owns and operates or invests in income generating real estate, such as office spaces, hotels, data centres and warehouses. Globally, there are also REITs that invest in apartment blocks.
For an individual investor, buying large real estate space as an investment may not be feasible. REITs are helpful here. Just like a mutual fund, investors can buy units of REITs, thus reducing his/her overall cost burden. The investor would earn a steady stream of dividend income and capital appreciation over time. REITs are also publicly traded, so from an investors perspective, the investment is also highly liquid. The advantage for a real estate developer is that the property can be monetised through a REIT. Similarly, infrastructure developers can monetise their infra projects through InvITs.
“The amount of money required to invest in real estate is huge and it is not really in reach of many investors. At the same time, the risk is equally high because of the investment size. With REITs, investors will be able to limit their investment based on their appetite and also get the benefit of that investment,” said Harshad Chetanwala, co-founder of MyWealthGrowth, an online investment and research platform.
The market regulator reducing the minimum application will help more small investors to access REITs and thus deepen the market.
“The latest announcement will remove the hurdle for small retail investors who despite their interest in this sector, could not invest due to the large ticket size. This reduction in the minimum ticket size will open up the market to those small retail investors and will also make it similar to any equity share in the minds of the investors,” said Sharad Agrawal, executive director – capital markets at Knight Frank India.
REITs are fairly new to Indian market, compared to many developed markets. The first – Embassy Office parks REIT – hit the market only in 2019. Since then two more – Mindspace Business Parks REIT and Brookfield India REIT – have gone public.
“All three listed REITs in India hold some of the best Grade A rent-generating office assets of the country. The sponsors of these REITs are marquee companies like Embassy-Blackstone, Mindspace by K Raheja and Brookfield. These office buildings are rented out to the world’s top IT and ITES companies, financial services companies among others,” pointed Gagan Randev, executive director, India, Sotheby’s International Realty.
Randev also believes that the latest SEBI move will encourage more retail participation. He also expects several other large real estate companies like DLF and Prestige to come out with their REITs in the future.
“Being a transparent, well-governed and high on disclosure investment opportunity for regular dividend income, we believe investors must definitely look at adding some REIT to their portfolio,” he added.
Over the last few years, as the services sector has grown, demand for quality office space has outstripped supply in many big cities. The COVID-19 pandemic, though, has had a huge impact on the commercial real estate sector over the past one year as most companies have switched to working from home. However, analysts reckon that post COVID people will start returning to offices and the good times will return.
“We have seen the impact of COVID on office real estate for the last 15 months, but even within that we have had a couple of good quarters between the two waves, where we saw good demand for office space. As the second wave recedes and companies return to work from office, we can see demand returning to the office sector,” said Agrawal.
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He further added that by investing in REITs one could avoid the hassle of actually buying, managing and maintaining the office space, rather there would be a professional team doing it. Also, the investor has the flexibility to sell the units and exit whenever he/she desires.
“Bringing the trading lot at par with equity shares will enable retail investors to invest in REITs and InvITs and earn attractive yields, vis-a-vis those offered by other fixed-income alternatives,” said Anurag Mathur, CEO of Savills India.
Chetanwala of MyWealthGrowth says REITs will add an element of diversification, but must be considered from a long-term perspective. It is a good alternative for those investors who would like to diversify after having reasonable allocation in other asset classes, including equity.
“REITs open up another avenue to invest, where returns can be better than debt and near equities depending on the portfolio of REITs in the long-term,” said Chetanwala.
