Commercial real estate is one of the most lucrative and resilient sectors in the Indian economy, as it offers both capital appreciation and rental income. However, investing in commercial real estate also involves high costs, risks, and hassles, such as finding suitable properties, arranging funds, managing tenants, maintaining properties, paying taxes, etc. Moreover, the commercial real estate market is often affected by various factors, such as demand and supply, economic conditions, interest rates, regulations, etc., which can impact the returns and liquidity of the investment.
Commercial Real Estate REITs
This is where commercial real estate REITs come in handy. REIT stands for Real Estate Investment Trust, which is a company that owns, operates, or finances income-generating commercial real estate assets, such as office buildings, shopping malls, hotels, warehouses, etc. Commercial real estate REITs are the shares of REITs that are listed and traded on the stock exchange, like any other public company. By investing in commercial real estate REITs, investors can get exposure to the commercial real estate sector, without having to buy or manage any property themselves. Commercial real estate REITs offer several benefits to investors, such as:
- Regular income: REITs are required to distribute at least 90% of their taxable income as dividends to their shareholders. This means that investors can receive a steady stream of income from their commercial real estate REITs, which can be higher than the interest income from fixed deposits or bonds.
- Capital appreciation: Commercial real estate REITs can also increase in value over time, as the underlying properties appreciate in value or the REIT acquires more assets. This means that investors can also benefit from the capital gains from their commercial real estate REITs, which can be higher than the returns from stocks or mutual funds.
- Diversification: Commercial real estate REITs can help investors diversify their portfolio, as they have a low correlation with other asset classes, such as stocks, bonds, or gold. This means that commercial real estate REITs can reduce the overall risk and volatility of the portfolio, and enhance the risk-adjusted returns.
- Tax efficiency: REITs are exempt from corporate tax, as long as they distribute at least 90% of their income as dividends. This means that REITs do not have to pay any tax on their income, unlike other companies. This also means that investors do not have to pay any tax on the dividends received from commercial real estate REITs, unlike other dividends. However, investors may have to pay capital gains tax on the sale of commercial real estate REITs, depending on the holding period and the tax slab.
- Professional management: REITs are managed by a team of professionals, who have the expertise and experience in the commercial real estate sector. They are responsible for selecting, acquiring, operating, and maintaining the properties, as well as raising funds and distributing dividends. This means that investors do not have to worry about the hassles and challenges of owning and managing commercial real estate themselves.
However, investing in commercial real estate REITs also involves some drawbacks, such as:
- Market risk: Commercial real estate REITs are subject to the fluctuations of the commercial real estate market, which can be affected by various factors, such as demand and supply, economic conditions, interest rates, regulations, etc. This means that commercial real estate REITs can lose value if the commercial real estate market declines or faces a slowdown. Commercial real estate REITs are also subject to the fluctuations of the stock market, which can be affected by various factors, such as investor sentiment, corporate earnings, global events, etc. This means that commercial real estate REITs can lose value if the stock market crashes or faces a correction.
- Liquidity risk: Commercial real estate REITs may face liquidity issues, as they invest in illiquid assets, such as commercial real estate properties, which can take a long time to sell or buy. This means that REITs may not be able to sell their properties quickly or at a fair price, if they need to raise cash or exit from an investment. Commercial real estate REITs may also face liquidity issues, as they depend on the availability and cost of debt and equity financing, which can vary depending on the market conditions. This means that REITs may not be able to raise funds easily or cheaply, if they need to acquire new assets or refinance their existing debt.
- Regulatory risk: Commercial real estate REITs are subject to the regulations and compliance requirements of the authorities, such as SEBI, RBI, etc. These regulations and requirements can change from time to time, and affect the operations and performance of REITs. For instance, REITs have to follow certain rules regarding the minimum asset size, minimum public float, minimum distribution, etc. These rules can limit the flexibility and growth potential of REITs. REITs also have to comply with the accounting and reporting standards, which can affect the valuation and transparency of REITs.
Therefore, investing in commercial real estate REITs requires careful research and analysis, as well as a long-term perspective and a risk appetite. Investors should not invest in commercial real estate REITs based on the hype or the dividend yield alone, but also consider the quality and performance of the underlying properties, the financial health and governance of the REIT, the growth prospects and competitive advantages of the REIT, the valuation and returns of the commercial real estate REITs, and the market conditions and trends of the commercial real estate and stock sectors.
To help investors in investing in commercial real estate REITs, we have compiled a list of the top three commercial real estate REITs in India, based on their market capitalization, distribution yield, portfolio quality, occupancy rate, and growth potential. These are:
- Embassy Office Parks REIT: This is the first and largest REIT in India, which owns and operates a portfolio of office parks and business centres across major cities, such as Bengaluru, Mumbai, Pune, etc. It has a market capitalization of over Rs. 40,000 crore and a distribution yield of over 6%1.
- Mindspace Business Parks REIT: This is the second REIT in India, which owns and operates a portfolio of office parks and business centres across major cities, such as Mumbai, Hyderabad, Pune, etc. It has a market capitalization of over Rs. 20,000 crore and a distribution yield of over 7%2.
- Brookfield India REIT: This is the third and latest REIT in India, which owns and operates a portfolio of office parks and business centres across major cities, such as Mumbai, Gurugram, Noida, etc. It has a market capitalization of over Rs. 10,000 crore and a distribution yield of over 8%3.
These commercial real estate REITs have shown resilience and growth in the face of the COVID-19 pandemic, as they cater to the demand for quality and flexible office spaces from the IT and ITES sectors, which are the key drivers of the Indian economy. These commercial real estate REITs also have a strong tenant base, with high occupancy rates and long-term lease contracts, which ensure stable and predictable cash flows. These commercial real estate REITs also have a robust balance sheet, with low debt and high interest coverage ratios, which enable them to withstand market shocks and pursue growth opportunities. These commercial real estate REITs also have a clear growth strategy, with plans to acquire more assets, expand their portfolio, and diversify their revenue streams.