Discover the appeal of Real Estate Investment Trusts (REIT) in India, a way to invest in real estate without owning properties. We explore the types of REITs available and highlight four prominent ones listed on Indian stock exchanges, offering a chance to diversify your portfolio and enjoy potential income from the real estate market.
The Context
The captivating appeal of real estate investment in India is magnified by the country’s unequal price-to-income ratio, making it a substantial endeavor for numerous Indian individuals.
To start, the price-to-income ratio acts as a benchmark to gauge housing affordability, comparing household income to the cost of a home. This involves dividing the median annual household income by the median house price.
For example, if the median house price is ₹1 crore and the median annual household income stands at ₹10 lakhs, the resulting price-to-income ratio would be 10. As a general guideline, a favorable home price-to-income ratio typically falls around 2 to 3, ensuring housing affordability.
This guideline essentially suggests that the median house price should be approximately two to three times the median annual household income. It enables individuals and families to allocate a reasonable portion of their income toward housing expenses while maintaining financial stability and avoiding excessive burdens.
However, in India, this ratio exhibits significant variation, ranging from 30.4 (in the case of Mumbai) to 4.4 (in the case of Bhopal), presenting considerable challenges for salaried individuals aspiring to participate in real estate and housing as an investment asset class.
Considering that real estate should be an integral part of every investor’s ideal portfolio, this exclusive article explores an affordable avenue for real estate investment—a financial instrument that is gradually gaining popularity in India.
What’s A REIT?
A Real Estate Investment Trust (REIT) is an investment vehicle that enables individuals to invest in real estate assets without the need for direct ownership or management of properties. REITs pool funds from multiple investors to invest in various real estate ventures, including commercial properties, residential complexes, shopping centers, and office buildings.
A notable characteristic of REITs is their requirement to distribute a significant portion of taxable income to shareholders in the form of dividends. This distribution allows REITs to enjoy specific tax advantages, such as exemption from corporate income taxes, as long as they fulfill the specific requirements outlined by tax authorities.
REITs provide individual investors with an opportunity to access real estate investments with relatively lower capital requirements compared to purchasing properties outright. They offer a means to diversify investment portfolios by including real estate assets and have the potential to generate income primarily through dividends, as well as through capital appreciation.
According to Indian regulations, it is mandatory for REITs to distribute at least 90% of their cash flows to the unitholders of the trust.
Types Of REITS
The realm of REITs encompasses three distinct types, each with its unique characteristics and functions.
Equity REITs
The majority of REITs fall under the category of equity REITs, which involve ownership and management of income-generating real estate properties. These REITs primarily generate revenue through rental income, rather than relying on property resale.
Mortgage REITs
Mortgage REITs provide loans to real estate owners and operators, either directly through mortgages and loans or indirectly through the acquisition of mortgage-backed securities. Their earnings primarily stem from the net interest margin, which represents the difference between the interest they earn on mortgage loans and the cost of financing these loans. It is important to note that mortgage REITs can be susceptible to fluctuations in interest rates.
Hybrid REITs
Hybrid REITs employ investment strategies that combine elements of both equity and mortgage REITs.
Where Can You Buy One?
REITs offer the advantage of being traded on prominent stock exchanges such as BSE & NSE, allowing investors to conveniently buy and sell shares, much like publicly traded companies. This liquidity enhances accessibility and facilitates easy entry into or exit from positions.
In the United States, there are approximately 225 REITs registered with the SEC, actively trading on major stock exchanges. Meanwhile, the REIT market in India is an emerging narrative, with Embassy Office Parks REIT becoming the first-of-its-kind instrument listed as recently as April 1st, 2019, captivating the attention of Indian investors.
Currently, there are four such investment vehicles listed on the Indian stock exchange, paving the way for the potential arrival of many more in the future.
1. Brookfield India Real Estate Trust REIT
Brookfield India Real Estate Trust REIT, an equity REIT based in India, operates as a commercial real estate vehicle. The trust’s portfolio primarily comprises campus-style office parks situated in Mumbai, Gurgaon, Noida, and Kolkata.
Currently, the company boasts a well-diversified tenant base of approximately 120 entities, including renowned multinational corporations such as Cognizant, Sapient, TCS, Capgemini, Wipro, Bank of America, Barclays, RBS, Accenture, Pine Labs, and others. Notably, Fortune 500 companies occupy approximately 37% of the total leased area, while the remaining 63% is occupied by other tenants.
2. Embassy Office Parks REIT
Embassy Office Parks REIT, categorized as a Hybrid REIT, engages in the ownership, operation, and investment of income-generating real estate and associated assets in India. It holds the distinction of being India’s first publicly listed REIT and stands as Asia’s largest official REIT in terms of area.
This Real Estate Investment Trust (REIT) offers investors the opportunity to access the advantages of real estate investment through the convenience of investing in publicly traded units.
The trust’s portfolio predominantly comprises diverse office parks and office buildings. Additionally, it encompasses strategically positioned amenities such as hotels, along with a solar park.
Currently, Embassy Office Parks REIT owns and operates a total of 8 office parks and 4 prime city-center offices, providing a collective leaseable area of approximately 42.4 million sq. ft. These properties are located across various cities including Bangalore, Pune, NCR, and Mumbai. Moreover, the REIT’s assets include 4 hotels featuring around 1,600 hotel rooms, as well as a notable 100 MW solar project.
3. Mindspace Business Parks REIT
Mindspace REIT, a Real Estate Investment Trust, is listed in India in accordance with the SEBI Real Estate Investment Trust Regulations of 2014. Positioned as a retail REIT, Mindspace primarily focuses on holding interests in rental-yielding commercial real estate assets.
It operates as a registered Trust and made its listing debut through the public issuance of units. The K Raheja Corp Group serves as the sponsor of Mindspace REIT.
The company’s portfolio comprises five integrated business parks and five high-quality independent office spaces, collectively encompassing approximately 31.3 million sq. ft. of leasable area. These properties are strategically located in the Mumbai Region, accounting for 41% of their buildings, followed by Hyderabad (40%), Pune (16%), and Chennai (3%).
4. Nexus Select Trust REIT
Nexus Select Trust REIT, a pioneering entity in the retail real estate sector, operates as a pure Equity REIT. This means that it focuses exclusively on owning and managing retail real estate assets, offering an opportunity to generate income from the premium square footage leased by renowned brands like Chroma, Starbucks, and Bata within shopping malls.
With the support of Blackstone Inc., Nexus Select Trust stands as the owner of India’s prominent consumption center platform, specializing in investments in retail real estate. As of December 31, 2022, the trust’s portfolio encompasses 17 operational shopping malls across 14 major cities, covering a vast area of 9.2 million square feet.
These malls house a diverse tenant base comprising 1,044 domestic and international brands, with a total of 2,893 stores. In addition to the shopping malls, the trust’s portfolio also includes two hotel assets and three office assets, collectively spanning an area of 1.2 million square feet.
Conclusion
In conclusion, for investors with limited capital seeking exposure to the real estate market, REITs present an appealing option. They often offer attractive yields that surpass those of high-quality bonds and many equities, making them particularly appealing to income-focused investors. However, the combination of income and potential rental growth can be enticing for all types of investors.
It is important to note that, in addition to considering tax treatment and slightly higher fees, investors should be aware of certain risks associated with REITs. Interest rate risk is one such risk, which arises from changes in interest rates. Liquidity risk is another factor to consider, as it may pose challenges when attempting to sell REIT investments quickly.
Furthermore, unlike companies in sectors such as technology, retail, consumer goods, and industrials, the valuation of healthcare REITs is typically based on cash flow or income-based approaches. Common methods for valuing REITs include discounted cash flow analysis, Comparable Company Analysis, Net Asset Value (NAV), and dividend discount model (DDM).
These valuation approaches are favored due to the relative liquidity of the assets held within REITs and the ongoing transactions of comparable real estate assets in the market. If you found the discussion on REIT valuation methods intriguing, please feel free to leave a comment requesting an exclusive feature on the topic.
We hope you found this article informative and enjoyable to read.
