• Wed. Sep 21st, 2022

REIT A New Era in Real Estate Investments in India-Srinath Sridharan

The Indian market has evolved over the years, with increased participation of retail investors, in equity and debt products, due to an increased awareness of investing in the capital markets. Investments in the stock market through direct SIPs and mutual funds have increased in recent years. Indian retail investors may have gotten used to equities more recently, but they have become one of the financial system’s largest net providers of funds.

Similar early signs have been seen in newer investment products like Real Estate Investment Trust (REIT). It took almost five years to introduce the first REIT listing in India. The REIT’s first Indian listing saw its share price rise by around 34% in its first six months, reducing the implied return to less than 6%, a remarkably low level for a market where risk is perceived to be. raised. Embassy Office Park, which was India’s first commercial real estate REIT, was underwritten 2.57 times the issue size of Rs 4,750 crore. This has given a welcome indication of the willingness and appetite of investors to diversify their investments into products other than traditional savings products. Today, there is optimism among retail and institutional investors about the performance of REITs, even though it is a relatively new product for Indian investors.

A REIT is a pool of real estate assets that can generate regular income and are held like a mutual fund. Just like in mutual funds you invest your capital and the capital is then invested in listed stocks. Likewise, with REITs, investor funds are deployed in Grade A commercial office real estate assets. desire until recently.

REITs provide a variety of benefits to different parties including the fund sponsor, investor, and real estate developer. Since REITs are mandated to distribute nearly 90% of their profits as dividends to REIT investors, one can be assured of a stable income stream (subject to occupancy of these assets). This could improve returns for investors in REIT funds. The assets of the REIT are normally secured by long term leases and therefore the risk to the investor is minimized. The long-term lease also ensures that the REIT’s income stream will continue in a more predictable manner. REITs bring professional management to the pool of real estate assets, just as mutual funds bring professional management to stocks and debt. A REIT offers investors a new asset class outside of traditional stocks, debt, cash and gold and thus helps diversify risk. They also become a fairly liquid asset over a period of time just like mutual funds. Since real estate is traded in the form of securities, creating demand and supply is much easier. REIT investors don’t have to worry about entry and exit charges.

The long-term prospects of any new investment avenue depend on the returns offered relative to existing options. REIT returns are made up of regular rental income as well as capital appreciation on the underlying real estate asset. Rental income provides defined and stable returns, while capital appreciation provides returns comparable to equity. REITs around the world have been able to generate high risk-adjusted returns as they strive to deliver the best returns from the equity and debt markets. Being hybrids, REITs also have the advantage of being less sensitive to stock market volatility and generating stable returns over the long term. REIT operators who have managed their debt prudently are in a better position to grow and increase unitholder returns.

It should be mentioned that due to the support of the Securities and Exchange Board of India (“SEBI”) and the Indian government through the Ministry of Finance (“MoF”), the first Indian REIT was established in April 2019.

SEBI, as the regulator of the capital markets, working to protect investments and increase the participation of retail investors in capital markets, has been proactive in undertaking several policy initiatives which have been beneficial for the further development of the product.

Recent initiatives include:

* Flexibility for changing sponsors for FPI / InvITs
* Reduced perpetual foreclosure requirement for sponsor to align with those applicable for IPOs
* Inclusion of mutual funds and insurance companies as “strategic investors” to attract a wider range of strategic investors
* SEBI has gradually made changes to increase non-institutional participation and reduced the trading lot size from Rs. 1 lac to Rs. 50,000
* Provisions to allow further capital increases in REITs, which will promote the growth of REITs
Authorize the charges on the units of the REIT to enable the promoter to raise funds

In addition, the Ministry of Finance made the necessary changes to the tax legislation, including:

* Recognition of REITs as tax transfer vehicles (for dividend and interest income from its investments in a special purpose vehicle (SPV)
* Tax exemption on dividends from SPVs to REITs
* No capital gains / MAT on swap of SPV shares against REIT shares
* Withholding tax reduced by 5% in the hands of non-resident investors on interest income

India attracted $ 43.5 billion in institutional investment in Indian real estate during the 2016-20 period. This is roughly five times the investment of US $ 9.4 billion made over the previous five years. Private Equity players have seen the value of Indian commercial real estate. The Marquee PE brands have invested and now own quality office assets in India.

Amid the COVID-19 lockdown, there appears to be some action in the commercial real estate space, particularly Category A corporate office space. Publicly available data shows the following: Major IT brands like Google, Accenture, Intel have signed rental contracts in India. RMZ, owner of office buildings in southern India, has rental agreements with global companies. Mindspace Business Parks, of the K Raheja Corp group, in its recently filed endorsement, said it has leased 7 lakh square feet since April 2020. Brookfield Properties, the global real estate services company Brookfield Asset Management has leased over 3.50 lakh square feet of office space in Mumbai BKC business district with five corporate clients. The Blackstone Group has raised more than $ 300 million by selling an 8.7% stake in Embassy Office Parks REIT through global operations.

The growing knowledge of the product will ensure acceptability and the gradual increase in retailer interest in this segment. The instrument will hopefully enable retail investors to participate in the growing opportunities to come in commercial real estate.