REITs or Real Estate Investment Trusts are companies that own, operate, or finance income-generating real estate assets, such as office spaces, malls, hotels, warehouses, etc. REITs offer investors a way to participate in the real estate market by buying units or shares of the REIT, similar to buying shares of a company. REITs distribute most of their income to the unit holders or shareholders as dividends, and also offer capital appreciation potential.

 

India REITs : REITs are a popular instrument globally, but they are relatively new in India. The first REIT in India was launched in 2019, and since then, the REIT market in India has grown steadily, attracting both domestic and foreign investors. However, the availability of REIT stocks in the Indian market is still limited, as there are only a few REITs listed on the stock exchanges, and the REITable stock in India is still under-penetrated.

 

But what are India REITs? How do they work? What are the benefits and risks of investing in India REITs? How can you invest in India REITs? In this article, we will answer these questions and provide a comprehensive overview of India REITs.

 

What are India REITs?

 

India REITs are REITs that are registered and regulated by the Securities and Exchange Board of India (SEBI), and that invest primarily in Indian real estate assets. India REITs have to follow certain rules and guidelines set by SEBI, such as:

 

• India REITs have to be structured as trusts, with a sponsor, a trustee, a manager, and a principal valuer.
• India REITs have to raise funds through an initial public offering (IPO) or a follow-on public offering (FPO), and list their units or shares on the stock exchanges.
• India REITs have to invest at least 80% of their assets in completed and income-generating properties, and up to 20% in under-construction or non-income-generating properties, securities, or cash equivalents.
• India REITs have to distribute at least 90% of their net distributable cash flow (NDCF) to the unit holders or shareholders as dividends, at least once every six months.
• India REITs have to maintain a minimum public float of 25%, and a minimum lot size of 50 units or shares for trading on the stock exchanges.
• India REITs have to limit their leverage ratio to 49%, or 70% if they have a credit rating of AA or above.

 

How do India REITs Work?

 

India REITs work by pooling funds from investors and using them to acquire, manage, and develop real estate assets, and generating income and returns from them. India REITs work in the following steps:

 

• The sponsor, who is the owner or developer of the real estate assets, transfers the ownership of the assets to the trust, in exchange for units or shares of the trust.
• The trust, which is the legal entity that holds the assets, appoints a trustee, a manager, and a principal valuer to oversee and operate the trust and the assets.
• The trustee, who is an independent entity that acts as a fiduciary for the unit holders or shareholders, ensures that the trust complies with the regulations and the trust deed, and protects the interests of the unit holders or shareholders.
• The manager, who is responsible for the day-to-day management and operation of the trust and the assets, selects, acquires, develops, leases, and maintains the properties, and distributes the income and returns to the unit holders or shareholders.
• The principal valuer, who is an independent entity that provides valuation services for the trust and the assets, conducts periodic valuation of the properties and the trust, and reports the net asset value (NAV) and the unit price of the trust.
• The trust raises funds from the public by issuing units or shares through an IPO or an FPO, and lists them on the stock exchanges, where they can be bought and sold by the investors.
• The trust generates income from the rental, interest, or dividend income from the properties, and pays out most of it as dividends to the unit holders or shareholders, and reinvests the rest in the properties or the trust.
• The trust also generates returns from the capital appreciation of the properties and the trust, and reflects them in the NAV and the unit price of the trust.

 

What are the Benefits and Risks of Investing in India REITs?

 

Investing in India REITs has several benefits and risks, such as:

 

• Benefits: The benefits of investing in India REITs are:
  • Income: India REITs provide a regular and tax-free income stream for the investors, as REITs distribute most of their income as dividends. The dividends are also higher than the average yield of the Nifty 50 index (1.3%).
  • Growth: India REITs also offer capital appreciation potential for the investors, as REITs benefit from the increase in the value of the properties and the rental income over time. India REITs have delivered an average total return of 14% since their listing, which is higher than the average total return of the Nifty 50 index (10%).
  • Diversification: India REITs also provide diversification benefits for the investors, as REITs have a low correlation with other asset classes, such as equities, bonds, gold, etc. REITs also have a low volatility and a high resilience, as they are backed by tangible assets and long-term leases.
  • Liquidity: India REITs also offer liquidity benefits for the investors, as REITs can be easily bought and sold on the stock exchanges. REITs also have a lower minimum investment requirement than physical properties, which makes them more accessible and affordable for the investors.
• Risks: The risks of investing in India REITs are:
  • Market risk: India REITs are subject to the fluctuations of the real estate market, which may be affected by various factors such as economic conditions, interest rates, supply-demand dynamics, consumer preferences, competition, etc. India REITs may also face the risk of vacancy, default, or renegotiation of leases by the tenants, which may reduce the rental income and occupancy rate of the properties.
  • Regulatory risk: India REITs are subject to the changes in the rules and regulations governing the REITs and the REIT market in India, which may be imposed by SEBI or the government from time to time. For instance, SEBI may impose restrictions on the leverage, diversification, valuation, or distribution policies of the REITs, which may affect their performance and returns. The government may also change the tax treatment of the REITs and their investors, which may affect their attractiveness and profitability.
  • Operational risk: India REITs may involve operational risks such as fire, theft, damage, or litigation related to the properties owned or managed by the REITs. India REITs may also incur expenses for maintenance, renovation, or development of the properties, which may reduce their net income and cash flow.

 

How to Invest in India REITs?

 

To invest in India REITs, you can follow these steps:

 

• Do your research: Before investing in any India REIT, you should do your research and analysis of the REIT’s portfolio, performance, financials, management, and prospects. You should also compare the REIT with its peers and benchmarks, and check its ratings and reviews from reliable sources. You can use the web search results from my predefined internal tool¹ to get some information about India REITs and REITs in general.
• Choose your India REIT: You should choose the India REIT that suits your risk appetite, investment objective, and preference. You can choose from the four India REITs that are currently listed on the stock exchanges, namely:
  • Embassy Office Parks REIT: This is the first and the largest India REIT, which owns and operates a portfolio of 42.4 million sq ft of office space across seven cities in India. The REIT has a market capitalisation of Rs. 36,000 crore, and a dividend yield of 6.5%. The REIT was launched in March 2019, and has delivered a total return of 25% since its listing².
  • Mindspace Business Parks REIT: This is the second India REIT, which owns and operates a portfolio of 29.5 million sq ft of office space across five cities in India. The REIT has a market capitalisation of Rs. 18,000 crore, and a dividend yield of 6.8%. The REIT was launched in July 2020, and has delivered a total return of 17% since its listing³.
  • Brookfield India Real Estate Trust: This is the third India REIT, which owns and operates a portfolio of 14 million sq ft of office space across four cities in India. The REIT has a market capitalisation of Rs. 9,000 crore, and a dividend yield of 7.5%. The REIT was launched in February 2021, and has delivered a total return of 10% since its listing⁴.

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