In recent years, the Indian financial markets have witnessed the emergence of innovative investment vehicles. Among these, Real Estate Investment Trusts (REITs) have garnered increasing attention for their potential to offer regular income and capital appreciation while ensuring liquidity and transparency.

Traditionally, investors seeking real estate exposure had limited options: purchasing physical property or investing in real estate company stocks. Today, REITs are a professionally managed, liquid, and regulated alternative.

REITs regulated investment structures introduced by the Securities and Exchange Board of India (SEBI) to channel long-term capital into real estate sector. REITs are structured similarly to mutual funds, where a trust collects funds from investors and issues units in return. However, unlike mutual funds that invest in securities, REITs invest primarily in income-generating real estate assets such as commercial offices, malls, and SEZs.

– Returns from REITs come primarily from two sources: 

1. Periodic Payouts – Dividends, Interest & Returns of Capital

2. Unit Price Appreciation – Capital Appreciation

– How to Buy a REIT? 

REITs available in the market can be Listed as well as Unlisted. Unlisted Or Private REITs are privately held and hence not available for general public. Listed REITs can be bought or sold just like stocks through a Demat and Trading Account.

Current Listed REITs 

i) Brookfield India REIT

ii) Embassy Office REIT

iii) Mindspace Business REIT

iv) Nexus Select REIT

– Factors to be checked while evaluating REITs 

1. Portfolio

Examine the type, quality, and location of real estate assets held. Compare across REITs Asset type (e.g., commercial Office, retail, mixed-use), Geographical diversification Total leasable area and occupancy rate.

2. Financial Analysis

Just like evaluating a company, key financials of a REIT must be assessed. Revenue, Profits, Cash flows, Debt and its trends needs to be studied across years. Some of the ratios which are unique to REITs are as follows:

a) Debt to Gross Asset Value – It measures a REIT’s debt against its total asset value (GAV).

b) WALE – It means Weighted Average Lease Expiry. WALE indicates the average remaining lease term across a REIT’s portfolio, providing insight into the stability of rental income and the potential risk of future vacancies.

3. Income Distributions

Tracking distribution payouts is crucial when evaluating REITs. The Distribution Yield a key metric reflects the income generated relative to the market price. A higher yield typically indicates better income potential, though it should be assessed in conjunction with the REIT’s overall financial health and asset quality.

4. Valuations

Valuation metrics are essential in assessing whether a REIT is fairly priced. One key metric is the Price-to-NAV Ratio, which indicates whether the market price of a unit is trading at a premium or discount relative to its Net Asset Value (NAV), helping investors gauge potential overvaluation or undervaluation.

– Outlook and Growth Potential 

REITs experienced significant challenges during the COVID-19 period due to reduced occupancy and rent deferrals. However, recovery trends suggest improved stability and growth going forward.  In US, over 90% of the real estate market is in REIT while in India, its below 20%. Thus, REIT story is still unfolding in India.

In the next 20 years, Indian Economy would be 20-25 trillion USD and Real Estate would be about 4-5 trillion USD. Industry projections suggest that REIT AUM in India could potentially grow 15–20 times over the next two decades. There are possibilities of divergent Data Centre REITs, Hospital REITs and even Residential REITs.

Further as GCCs and Foreign companies find India adorable from rent perspective, sustainable long term rent generating assets can be available.

How to see REIT as an investment vehicle?

As per Ritwik Bhattacharjee, CEO of Embassy REIT, Real Estate Investment Trusts can be seen as a high dividend paying stock of a Real Estate Company.

REITs are best suited for long-term investors seeking steady income and moderate capital appreciation.

– Recommendation: 

From an asset allocation perspective, investors can consider allocating up to 5%-10% of their overall portfolio to REITs. However, it’s important to keep the total real estate exposure (including direct property, real estate funds, and REITs) within appropriate limits based on one’s goals and risk appetite. 

To understand more on the topic as well as to start investments please feel free to contact us:

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