[Finally REIT’s IPO has been announced in India in Mar’19. Read more about India’s first Real Estate Investment Trust (Embassy REIT) here.]
Since long, the real estate sector’s growth is sluggish. It seems like the prominent players like DLF etc has already seen their golden days. But, it is not a matter of growth and debacles of only ONE company. Whole of India’s growth story is dependent on real estate sector.
Presently, the real estate sector is mostly disorganised.
This is resulting in disintegrated developments across India.
I personally feel that introduction of REIT Funds in India can make this sector largely organised.
There seems to be no road map for this sector. Cities like Mumbai, Bangalore, Delhi NCR, Pune, Chennai, Hyderabad are seeing fast growth.
But who is benefiting from this growth?
Quality properties are expensive and are beyond the reach of majority population. Common men can get their hands on only below-average properties.
Its only the rich who are benefited.
What government is doing to include common men in the real estate growth story?
- One big step taken by Indian government in 2016 budget is to pass real estate regulators bill. This regulator will take care of the concerns of all real estate investors.
- The second big step taken by the government in 2016 budget is removal of Dividend Distribution Tax (DDT)associated with REIT Funds in India. DDT was a big obstacle in implementation of Real Estate Investment Trusts (REITs).
Now, REIT Funds in India will soon become a reality. As on date, there are no REIT listed in India which are available for investment for common men.
REITs is an investment concept that will benefit common men the most.
In order to give a push-start to REITS implementation in India, SEBI/Government has approved FDI in REITs.
This will make REIT Funds popular in India. Further, when common men participation will improve and penetration of REIT funds will improve even more.
Soon, shares of REITs will be available for online trading. Like common shares, REITs can also be traded. Involvement of common men will result in huge cash-inflow for REITs.
The more will be the funds accumulated by REITs, brighter will be the India’s growth story.
REIT Funds in India will do more good…
REITs will invest its funds in real estate properties.
The main target of REITs will be shopping malls, hotels, offices, hotels, nursing homes etc. At present, in India, REITs will not be allowed to buy residential buildings.
But one important query?
Why people should buy REITs fund units? Why not buy commercial properties directly?
- Direct investment in real estate property is very capital intensive. But each shares of REITs will be comparatively more affordable (it will not require large capital outflows).
- Moreover, buying property directly exposes common men to the POWERFUL BUILDERS. Investing through REITs will eliminate dealing with builders altogether.
- REITS will also easy the whole process of investing in Real Estate Properties, how?
Imagine yourself buying a property for investing purpose?
What steps one has to take while investing?
- Identify a good property,
- book a property,
- make self-contribution,
- arrange for balance funds (if loan is required),
- prepare a sale deed,
- registration of sale deed,
- taking of handover from present owner/builder,
- maintenance of property etc.
But buying REITs (instead of directly a property) will eliminate all these steps.
REITs is perhaps the most transparent investment vehicle available for common man to invest in real estate market.
REITs are also regulated by a regulator which will further eliminate the chances of any bungling commonly done by substandard-builders.
Properties developed by quality builders are expensive and are generally out of reach of common men.
But this is also true that, investment in properties developed by quality builders will guarantee good capital appreciation.
Still common men cannot buy it as investing in them requires more capital.
But REITs will clear this hurdle.
Investment in real estate market through REITs will give the accessibility to common to invest in properties developed by the quality builders.
How investors earn money after investing in REITs?
REITs are very similar to mutual funds. They are an investment option for income generation and not for capital appreciation.
How REITs provide income to its investors?
Like dividend linked mutual funds pay dividends, similarly REITs also pay dividends to its shareholders.
But the only difference is, certainty of dividend earnings from REITs is higher.
REITs are designed specifically for defensive investors whose focus is not on large gains but more on consistent income.
How REITs make money for themselves?
REITs either owns or finances the production of real estate properties. These real estate properties generates income for REITs.
The income is generated in form of rents.
The income is also generated by sale of property. Generally REITs do not sell their holdings. But if the property is getting old, REITs may prefer to sell it to buy a new one.
The net profit made by REITs is distributed among its shareholders in form of dividends.
Possibly, there will be two types of REITs Funds in India:
- Equity REITs: they are the owners of large real estate properties. What they own are big shopping malls, large office spaces, massive residential townships etc. Equity REIT funds make money by giving these spaces to tennants on lease. This earned income is then distributed among the REITs investors as dividends.
- Mortgage REITs: the are not the owners of any properties. They have only finances the debt for those real estate projects. Means, they get the EMI’s against those properties (from the developer/builder/owners). These earned income in form of EMI’s are then distributed among the REITs investors as dividends.
What makes REITs such an attractive investment?
REITs are listed in stock market, hence all relevant details will all be available online for its investors. This is what will attract investors towards REITs (transparency).
Secondly, investors will also like REITs post acquiring in the following ways:
- REITs generates income in form of rent. Rental income from real estate is very assured. This certainty of income will make REITs an instant hit with the investors.
- One can buy REITs from comfort of their homes. When buying a physical-property is more than 30 days, tiresome exercise., people can buy REITs like shares.
- On an average REITs can yield close to 10% per annum returns for its shareholders. A fixed income generating option, yielding 10% p.a return is good.
REITs Funds is good for both builders and investors?
From builders perspective: Builders can approach REITs for their working capital requirement. REITs can prove as an alternative to bank loans for builders.
REITs will also work as a financier for big real estate projects.
Investors perspective: Investors can buy shares of REITs to generate stable income for themselves.
Instead of buying a physical property, people would prefer buying shares of REITs.
These shares they can keep in De-materialized form in the Demat account.
Physical properties has costs like Property tax, maintenance expenses, etc. But with REITs shares there will be no such expenses.
Investors would also buy REITs for the sake of portfolio diversification.
Beneficial for the market as a whole: REITs launch will also give rise to new types of mutual funds.
These mutual funds will buy shares of REITs only.
Hence launch of REITs will provide an alternative investment option for investors in form of ETF’s and mutual funds.
What was the problem of DDT and Withholding Tax with REITs?
REITs is not like any other equity linked investment option. The sole purpose of REITs is to generate income for its investors.
If REITs are asked to pay dividend distribution tax (DDT of 15%) from its taxable income (before payment of dividends), it will decrease its yield.
Further more, ten percent (10%) of withholding tax should be paid by investors on the dividend income they earn. This further reduces the yield of REITs.
It is important to note that REITS are income generating vehicle.
If charges like DDT and withholding taxes become applicable on income, REITs yield be too low.
In case, yield of REITs becomes lower than fixed deposit, its whole purpose will fail.
Currently companies are not launching REITs with this fear in their mind.
Government of India was expected to remove at least DDT to make it as successful as U.S.A’s REITs.
In developed economies, interest rate hovers around 3-4% per annum.
In such markets, even if REITs provides 6% yield its considered good. But in market like India, where interest rates are over 8% per annum, returns lower than 10% cannot make it an attractive investment.
This is one reason, removal of DDT and withholding taxes was a must.
Hence in 2016 Union Budget of India, DDT was removed from REITs.
How much one can invest in REITs?
During the IPO stage minimum investment in REITs is Rs 2 lakhs. In primary market REITs can be traded with investment cap of Rs 1 lakhs.
This cap is expected to be lowered to include the involvement of common men.
But in initial stages, the cap will be intentionally kept at higher levels.
Get disheartened by seeing the high values like Rs 2 lakhs? Do not be. Compare this value with cost of any physical real estate property.
Even in the average cities of India, a 2BHK apartment will cost close to Rs 30-35 Lakhs.
REITs Funds in India – Update 2018
Implementation of REITs in India has been continuing since last six-seven years.
All major road-blocks/apprehensions has been eliminated. But the issue of 15% DDT payment has kept its implementation non-functional since last couple of years.
- In year in 2016, finance ministry has decided to remove the DDT clause.
This is considered a big leap forward in the implementation of REITs in India.
- In Dec’2017, SEBI also allowed REITs to invest 50% of its funds in holding companies is also a welcome move.
This step will encourage companies to launch its REITs funds in India.
- In Jan’2018, a news floated that Embassy Group will list the India’s first REITs funds.
This fund will have a partner in Blackstone Group Lp. This fund was supposed to be launched in Apr’18.
But as on today, its launch has been delayed till June’18.
InvITs in India
What are InvITS?
They are infrastructure Investment Trusts.
InvITs are very similar to REITs Funds. Like Mutual Funds, InvITs pool small sum of money from invests.
This pooled money is then investment in Infrastructure projects to generate cash flow (income).
It is mandatory for InvITs to invest 80% of the pooled money in “income generating infrastructure projects“.
A portion of this generated income (minimum 90%) is distributed among InvIT investors as dividends.
What is the objective of InvITs?
It helps in funding of large infrastructure projects like National Highways, Expressways etc.
Such infrastructure projects takes time to generate income for the developers.
Hence investors are roped-in with objective of long term holdings (ideally above 10 years).
This benefits both the investor and the developer.
How a common man can invest in InvITs?
InvITs are listed in NSE/BSE like stocks. This makes purchase & sale of InvITs easy.
But there are 2 big limiting factor that makes InvITs not suitable for common investors.
- InvITs can be bought in an IPO. People buy it in IPO and hold for 10 years or more.
- Minimum investment amount in InvITs is Rs.10 lakhs.
List of InvITs in India
- GMR Infrastructure Investment Trust
- IL&FS Transportation Investment Trust
- India Grid Trust
- IRB InvIT Fund
- MEP Infrastructure Investment Trust
- Reliance Infrastructure InvIT Fund