Earn smarter returns with Real Estate Investment Trusts (REITs)

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India’s commercial real estate market is ripe with opportunity – we are, after all, a nation that is on the rise. Our economic juggernaut is moving at high speed towards a $5 trillion economy, and it shows in the sheer number and variety of businesses that are on the rise.

Historically, the allure of investing in commercial real estate has been out of reach for the average investor: high entry costs and a lack of liquidity. These factors have traditionally kept average investors at arm’s length from this asset class. This landscape, however, is undergoing a transformative shift, thanks to the advent of REITs.

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Introducing REITs

REITs are an asset class that bridge the divide by bringing the opportunity to invest in high-end commercial real estate to retail investors. Simply put, in India, REITs own, operate, or finance income-generating real estate properties. As an investor, you get to invest in these trusts, and in doing so, into the commercial real estate (office spaces, malls, and more) these trusts own.

Here’s the best part: REITs are traded on the stock exchange, which means your commercial real estate investment is now liquid. It’s as simple as logging into your demat account and buying and selling it as you would any other asset. What’s more, the entry barrier is now a non-issue too: you can start your commercial real estate journey with REITs for as low as Rs 100 per unit, and there is no minimum trading lot size.

How does a REIT generate returns?

REITs provide total returns with a cash distribution yield and capital appreciation potential through growing property valuation.

At the heart of the REIT structure is the distribution yield feature, a compelling attribute that distinguishes REITs from other investment vehicles. REITs pay out dividends, which are derived from the rental income from the underlying assets. When you invest in a REIT, you aren’t buying into a fixed asset, but into a trust that owns a number of these fixed assets. Essentially, all the rent from these assets is pooled, and after deducting operating costs and expenses, the net distributable cash flows are distributed to investors as dividends.

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In India, REITs are mandated by the Securities and Exchange Board of India (SEBI) to distribute at least 90% of their net distributable cash flows to investors every six months. There are four REITs operational in India today (Embassy REIT, Mindspace REIT, Brookfield India REIT and Nexus Select Trust) and all of them distribute on a quarterly basis. In just five years, these four REITs have distributed more than ₹15,500 crores. To put that into context, according to the Indian REIT Association (IRA), these distributions surpass the entire NIFTY Realty Index, combined.

How do REITs create growth?

While consistent yield is an attractive feature, REITs also offer investors the potential for equity growth. Several growth levers inherent in the REIT structure contribute to this potential: first, most commercial leases include contracted rent escalations, typically around 15% every three years. This mechanism ensures growing income streams from existing leases. Second, by filling up occupancy within their portfolios, REITs can directly increase rental income, thereby enhancing their distributable cash flows and, by extension, distributions to investors. Third, as leases come up for renewal, REITs have the opportunity to adjust rents to current market rates, potentially increasing income. Fourth, REITs often engage in the development of new properties, which can add value to their portfolios upon completion and lease-up. Fifth, acquisitions of new properties can contribute to both the diversification and growth of a REIT’s portfolio, enhancing its value and income-generating potential.

Increasing appetite for REITs

There is, understandably, tremendous investor appetite for REITs. Finally, here is a way for Indian retail investors to invest in highly profitable high-end commercial real estate, in an easy, convenient, and cost-effective way. No messy paperwork, no middlemen, no hassles that come with owning a real estate asset.

REITs unlock both appreciation and steady growing income for investors. Plus, there’s the multiplier effect of investing in a REIT that will continue to acquire new income generating properties.

No need to put off real estate investments anymore when REITs can be bought for as low as Rs 100 per unit. And finally, REITs allow investors to participate in the highly attractive commercial real estate sector without any lock-in period, because REITs are a liquid asset that can be openly and easily traded.

If that isn’t an asset class tailor made for the preferences of the Indian retail investor, we don’t know what is!

For More information on REITs log onto https://www.cnbctv18.com/ms/ira-reit2024/

Moneycontrol journalists were not involved in the creation of the article.