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India Embassy REIT – Easy and Liquid Way to Gain Exposure to Real Estate
As a finance professional, the Indian investment market has always intrigued me. While the investors don’t seem to be open to accepting new ideas or investment products easily, once they do, there is no stopping the demand for a good investment instrument. If you turn the pages of history, you can see that right from the time mutual funds were first introduced to the launch of India’s first Real Estate Investment Trust (REIT), India has accepted good investment opportunities with open arms. Although investment gurus tend to brand India as a country of conservative investors who prefer traditional instruments over the modern ones, the facts speak a different story.
I like to see India as a country of careful and objective investors who take their time to understand a product before including it in their portfolios. Hence, it is no surprise that while the REITs were introduced in the US markets way back in the 1960s and around 30 countries with already established REIT markets, India saw the launch of its first REIT, Embassy Office Parks REIT in March 2019. In this article, I will take you through India REIT story and explore its efficacy in the Indian market.
What is a REIT?
Real estate has been the most popular form of investment around the globe for centuries. However, investing in real estate meant spending a considerably large sum of money to buy a property. The returns included rental income and capital appreciation. Due to the high investment requirement, many investors could not benefit from the growth of the real estate sector in a developing country like India. A REIT is a solution to this problem.
A REIT can be likened to an Exchange Traded Fund (ETF). While an ETF holds a portfolio of stocks, a REIT has a collection of commercial and/or residential properties or mortgages. It is launched like a mutual fund where investors can buy units and benefit from investing in the real estate sector. Around the world, REITs are popular investment vehicles as they offer people an opportunity to earn returns that reflect the performance of the overall real estate market. They are good investment options for people looking for capital growth as well as regular income.
How does a REIT work?
A close friend (Samir) recently read about REITs and was intrigued by the success of this investment avenue around the globe. He wanted to know more and tried reading about REITs online but was still confused. He is my cycling-buddy and one day after we finished our early morning cycling trip, he casually asked me if I knew about REITs. I tried explaining it to him in the simplest possible terms:
Samir: Sujit, do you know about REITs?
Me: Yes, I do. Why do you ask?
Samir: I read that India has launched its first REIT and was curious about it. However, when I read about them online, I was a little confused.
Samir: Yes. How do REITs actually work?
Me: Well, let’s see…Firstly, a REIT is an investment trust – like a mutual fund. It collects funds from multiple people and invests it in the real estate sector like commercial and residential properties, industrial units, shopping centers, restaurants, etc. Investors receive units for the amount invested by them. These units are listed on a stock exchange that can be traded. Also, REIT attempts to generate returns via rental income as well as capital appreciation on the sale of the properties.
Samir: That’s fascinating. So, I can invest in real estate without spending crores!
Me: Exactly! That’s why REITs are so successful around the globe. They offer a lot of benefits too.
Samir was thrilled and as we cycled back, I could hear his thoughts going crazy about this new investment opportunity. He didn’t ask me about the detailed benefits of REITs – I assume he would try to Google it again and come back if he gets confused – again. However, for your benefit, here are the advantages of investing in REITs.
Advantages of India REITs
Here is a quick look at the advantages of investing in REITs:</p
- Capital Growth & Regular Income – As explained above, REITs offer the dual benefit of earning regular returns while the asset grows in value. Hence, in a developing economy like India, REITs can offer better returns than most other investment instruments.
- Liquid Real Estate Investment – One of the biggest problems of investing in real estate properties is the lack of liquidity when you urgently need funds. You can’t sell a property overnight, right? However, with REITs, you can liquidate your investments since they are traded on major stock exchanges.
- High Dividend Yield – According to regulations, REITs distribute around 90% of their income as a dividend to investors. Hence, the dividend yield is usually higher than most equity investments. Additionally, REITs tend to offer returns in all market conditions.
- Portfolio Diversification – Real Estate is always a good addition to any investment portfolio as it has a low correlation to other asset classes. With REITs, this is possible without burning a hole in your pocket.
- Inflation Hedge – The most important benefit of investing in real estate is that it naturally provides protection against inflation. As inflation increases, investments tend to offer lower returns. However, increasing inflation is usually accompanied by increasing real estate prices. Hence, as the returns on your other investments decrease, the REIT investments will increase offering a hedge against inflation.
India REIT Story (Embassy Office Parks REIT)
March 18, 2019, was a historic day for Indian REITs. It was the day when the country’s first REIT IPO (Initial Public Offering) was launched by Embassy Office Parks, backed by the global private equity firm Blackstone Group LP. The Embassy REIT intended to raise around INR 4570 crore by selling each unit at INR 299 to 300.
Over the last nine months, the demand for India’s first REIT(Embassy) has increased with the share price climbing around 35 percent. This was a successful launch – thanks to robust investor interest and progressive regulations. Investors around the globe have been keen observers of the growth of the Indian commercial real estate sector for quite some time. The success of the Embassy-Blackstone REIT has sent a positive signal to them.
India REIT – The Future through a Kristal Ball
The commercial real estate sector in India is abuzz with excitement. While developers can work on more projects by improving their liquidity, investors – both domestic and global – retail and institutional, now have an opportunity to participate in India’s real estate success story. In the more developed REIT markets, retail as well as residential REITs are as successful as commercial REITs. However, in India, issues like business models and shorter lease tenures will need to be considered before the mall and shopping center developers go to the REIT-way. Also, for the residential sector to become REIT-friendly, India would need a rental policy – like in the US, Singapore, etc.
A quick look at the horizon seems promising. Players like the Prestige Group, K Raheja Corp, RMZ Corp, Panchshil Realty, and Godrej Properties are also said to be considering the launch of REITs. While there are several concerns regarding the complex taxation rules* of REITs in India, the regulators will need to create an investor-friendly ecosystem to allow this segment to grow.
* Complex Taxation Rules: A REIT may distribute a large part of its income as interest, dividend, or capital gain. Each of these will have different tax treatment in the hands of the investor. Hence, it is important for the investor to file tax accordingly. So, capital gain received will need to be filed as ‘capital gains’ and the investor will need to pay the applicable tax.
I am associated with Kristal.AI, an organization dedicated to leverage technology and product innovation to offer financial products that are more relatable to investors today. At Kristal, our team endeavors to help investors create portfolios that can help them achieve their financial goals with ease.
We have been particularly thrilled with the launch of Embassy Office Parks REIT, India’s first REIT. We believe that the Indian REIT industry can learn a lot from the developed US, UK, and Singapore markets. It has a fairly developed real estate sector that can be leveraged to establish a strong REIT market that benefits developers and investors alike. With a promising start, I feel that India REIT story is just getting started – 2020 can be a year when REITs establish their presence in the investment landscape in the country.
This blog article has not been reviewed by the MAS. It is prepared solely for information purposes and does not constitute an offer or solicitation for the purchase or sale of units in the funds. This does not constitute any form of investment advice and Kristal Advisors (SG) Pte Ltd does not take into account your personal investment objectives, specific investment goals, specific needs, or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Kristal Advisors (SG) Pte Ltd.