What is REIT India? Whether to Invest or Avoid?

REIT is an acronym for Real Estate Investment Trust. REIT is basically a company which develops and own ‘income producing’ real estate properties. IPO of India’s first REIT was launched on 18-Mar’19. Shares of Indian REIT started trading from 01st April’19 in Bombay Stock Exchange.

Embassy REIT

Share Price (Rs.)A339.9
– 52W High (Rs.)A.1348.9
– 52W Low (Rs.)A.2300
Book Value (Rs.)B399.88
Face Value (Rs.)C300
Market Cap (Rs.Cr.)D26,228
Nos. of Shares Outstanding (Cr.)E = D/A77.16
P/B RatioF = A/B0.84
Min. Buy Qty (nos)G400
Min. Investment (Rs. Lakhs)H = A*G1,35,960

Table updated as on 15-May’19. Read more about EMBASSY REIT here…

How REITs work?

REIT Introduction…

Real estate sector needed a push in India. In cities like Mumbai, Bangalore, Delhi NCR, Pune, Chennai, Hyderabad, real estate work is good. But who is benefiting from this growth? At least not the common man. Why?

Because quality properties are expensive and are beyond the reach of majority population. Common men can get their hands on only below-average properties. It is only the rich who are benefited.

What government has done to include common men in the real estate’s growth story?

  • In 2016 budget, they passed the real estate regulators bill. Now there is a “regulator” who will take care of the concerns of all real estate investors.
  • In 2019 March, IPO of India’s first REIT was launched.
REIT India - 1

Why to invest in REIT?

One of friend asked this interesting question about REIT. Why to buy REIT shares and not directly buy commercial properties? Because of the following Reasons:

  • Less Capital Intensive: 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).
  • Suitable for small Investors: Moreover, buying property directly exposes common men to the POWERFUL BUILDERS. Investing through REITs will eliminate dealing with builders altogether.
  • Transparency: REITs stocks are listed in stock market. Hence all relevant details will all be available online for its investors.
  • Assured Dividends: REITs generates income in form of dividend. REITs dividend payment is very assured. Why? Because most of their income is in the form of rental (lease) income.
  • Tax Free: Dividend earned by the investors of REIT will be tax free.
  • Fast Capital Appreciation: As Embassy REIT is first of its kind in India, its capital appreciation in next 5/7 years can be phenomenal.
  • Easy to buy: 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. REIT is also regulated by a regulator which will further eliminate the chances of any bungling commonly done by substandard-builders.

Again, properties developed by quality builders are expensive and are generally out of reach of common men. 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.

Example: Has EMBASSY REIT not introduced in India, how many of us could have purchased an office space of such high quality? I hope you are getting my point.

How REIT’s investors make money?

REITs are similar to mutual funds and shares. How REITs provide income to its investors?

  • Dividend: REITs pay dividends to its shareholders.
  • Capital Appreciation: As REIT stocks are listed in BSE and NSE, price appreciation of its shares will also make money.

How REITs make money for themselves?

REITs can earns revenue in two ways, depending on the type of REIT we are dealing with. Broadly speaking, there can be two types of REITs in operation:

  • Equity REITs: they own large real estate properties like shopping malls, office spaces, massive residential townships etc. Equity REITs make money by giving these properties on rents or long term lease. The earned income is then distributed among the REITs investors as dividends.
  • Mortgage REITs: they are not the owner of 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.

How REIT makes it win-win…

REIT is good for both builders and investors in India. Moreover, if things go as planned, REIT is going to be the next big thing for the investment world. Why? Because it has capability to create a win-win situation for all. How? Let’s see…

  1. Builders Perspective: BuildBuilders 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.
  2. Investors perspective: Indian investors can buy shares of REIT to generate stable income for themselves. Instead of buying a whole physical property, people would prefer buying shares of REIT. Even in terms of portfolio diversification, REIT will be a great alternative.
  3. Market’s Perspective: REIT launch will benefit the whole financial market of India in long term. REIT launch has given rise to a brand new investment vehicle for the investors. This will not only benefit existing investors, but may also bring new investors in the market. This way, the whole “investment activity” in the country will see a growth.

Expected Returns from REIT India

On an average, returns of real estate investment in India can yield returns close to 8%+ p.a. But this I am talking about average residential properties.

When it comes to premium commercial properties (like office spaces of Embassy, or shopping malls etc), the return yield could be better (like 10-12%+ p.a.).

6 Comments

  1. Hi Mani, thank you for this article on a subject on which relevant India based info is less and sparse. I have a unique question for you but please allow me to provide a bit of context to my question. I am part of a conservative Muslim community based in India (as are many of my co-believers), and as such we are governed by Sharia Law – which encompasses matters relating to God and this world. Towards he latter – world laws – there are some stringent rules concerning Usury/Interest (Riba) due to which we are unable to invest in regular FD, stocks etc – and for practicing Muslims many follow this. The somewhat clear cut options left open to us are Gold ETFs, Owning or Renting out properties or Equipment, and few others. The second one – owning or renting out properties – is a great avenue but something an average middle income folk cannot do regularly or successfully as you can understand. So the REIT inclusion is a boon to many conservative Muslim investors here. Now my question is – since this has just been introduced – how long should one wait to invest in REITs, or should one wait at all. One of my banker friends told that everyone is in a wait0and-watch mode as far as the success of REITs is concerned. Would highly appreciate your opinion and answer. Thanking you in advance.

    • Hi, you have framed your question excellently. It was nice reading your piece.

      People are sceptical about REIT in India because of below par performance of InvITs. Like InvITs, REITs are also companies (working like Trusts), and they are traded in stock market like any other stocks (or ETFs). So for investors who are sceptical has two main reasons:

      InvIT: InvITs closely resemble REITs. InvITs did not do well in India. Why? Because their portfolio was mainly Government owened assets.
      REITs: Embassy REITs on other hand has a portfolio which consists of top class office spaces.

      It is the quality of assets that a company has, which decides its future. I feel that Embassy REITs portfolio is reasonably strong and has good long term prospects.

  2. Thank you Mani… i will go through it and will catch up if i still have something to ask you 🙂
    Just a query, is there a possibility where you can create a separate page where we can ask general questions just like above one? so rather we ask such unrelated questions in blogs we can ask generic questions on such comments page?

    • It’s a good idea. I will surely reconsider it. Actually I had one in the past, but it was mostly receiving out-of-subject comments. But I would surely start it again. Thanks for the idea.

  3. Hi Mani,
    Needless to say i have been reading your blogs more than a year now. Also started using your excel utility for stock screening. All your blogs really helps. My question is bit unrelated to this blog, but not sure where to ask it. So it’s below now 🙂
    Do you see a possibility of a long running global recession in near future?

Leave a Reply

Your email address will not be published.


*