Express news service
Indian households love real estate. In India, the average family owns 77% of their total assets in real estate, according to a July 2017 RBI Household Finance Committee survey. These include residential buildings, buildings used for agricultural and non-agricultural activities, construction of recreational facilities and grounds. Since 2014, the Securities and Exchange Board of India (SEBI) has also opened up commercial real estate for investment.
In urban areas, many people often own a house and buy another as an investment. They rent it out to generate a second income. Likewise, many wealthy people in India buy office space or commercial stores and rent them out to businesses. However, managing a real estate portfolio is a challenge. There is a lot of physical paper that has to move if you are to lease your premises. You must be personally involved in signing the registration of rental and purchase contracts.
You must renew your lease each year and stay on constant alert to protect yourself from fraudulent transactions. Real estate investment trusts, or REITs, are a new way to invest in the real estate market. These are similar units of mutual funds that you can buy on the stock exchange. They invest in real estate assets that generate rental income such as shopping centers, office buildings and apartment buildings. These trusts must distribute 90 percent of the income they generate from rent. When an asset is sold, unitholders also benefit from capital gains.
There are three REITs listed in India that allow you to get exposure to commercial real estate in major metropolitan cities like Mumbai, Bengaluru, Gurugram, and others. In the United States, more than $ 3.5 trillion in assets belong to such funds, and much of the retirement money ends up in these funds. It’s a very structured way to invest in income-generating real estate. This column advocated that money in physical assets is protection of capital. This is primarily for those who do not want to risk their savings in financial assets driven by market cycles.
However, REITs are a financial innovation that can get you in and out of income generating properties quickly. It is in fact the securitization of real estate. This means that people can trade parts of this income generating property. It is too early to assess the performance of these REITs, but given their popularity in the United States and other markets, it should not be long before they reach the same level. In addition, Indian households prefer real estate to any other form of investment. The other real estate investment option is the fund of funds. It is a mutual fund that invests in various REITs available across the world. Kotak Mutual Fund has launched such a fund for the Singapore market.
What it means to you
They say you should invest like the rich do. The rich in India invest primarily in commercial and residential real estate portfolios. Globally, around 16% of assets managed by family offices are invested in real estate, according to UBS, a global bank. Their latest annual family office survey showed that buying and managing real estate is essential for the first and second generation. It is not just an Indian phenomenon. This column maintained that investment is only for equity assets. All other asset classes are capital preservation.
It may not be easy for you to start owning financial assets and equity-focused assets. As the stock markets go through cycles of volatility, you may want to continue to hold onto your real estate and gold savings. One thing to do might be to look at options such as REITs for investment, for example, instead of buying a second or third apartment, or business unit. As more individuals invest their assets in REITs, professional property management firms can evolve across the country.
It would be a very structured way of channeling resources into the real estate sector. Offices are now empty due to the pandemic and the prices of the three REITs listed on the Indian stock exchanges are low. However, the Indian economy is expected to grow by more than 10% in 2021-2022 after the contraction of this fiscal year. As businesses return to normal, demand for commercial real estate is expected to improve steadily, making REITs an alternative investment channel.
Securitization of real estate assets
Real estate investment trusts or REITs are a new way to invest in the real estate market. These are mutual fund units that you can buy on the stock exchange. REITs invest in rental income generating real estate assets such as shopping malls, office buildings and apartment buildings
(The author is editor-in-chief at www.moneyminute.in)