And REITs seems to be a good alternative for those who cannot afford to invest big time in Real Estate.
Buying a REIT is the most transparent way to own Real Estate for a Lay Man.
WHAT IS THIS REIT ?
Real Estate Investment Trust, known more popularly in its short name, REIT is similar to Mutual funds.
A REIT collects money from Investors and invests in Real Estate Properties (commercial and residential) with the intention to generate FIXED INCOME through Rents.
Since the earning is from RENT, which can be monthly, quarterly, Half Yearly or even Yearly, REITS pay, typically, dividends on a Half-Yearly basis.
Indian Laws specifically say that REITS can invest only in those properties that are at least 80% completed.
SEBI came out with list of DOs and DONTs for REITs way back in 2014 and in US, REITs are in vogue for quite a long time and more than 300 are registered and about 40,000 commerical Properties in the US are owned by REITs !!
SEBI, to begin with, has mandated the MINIMUM investment to Rs.2 lakhs and just recently further reduced it to Rs.50,000.
STRUCTURE OF A REIT :
Exactly similar to a Mutual Fund, REIT too will have a Sponsor which establishes a Trust.
SO, HOW EXACTLY DOES A REIT WORK :
1. A REIT (like a Mutual fund) collects money from Investors.
2. These monies are invested across Rent Generating Properties.
3. The REIT collects the Rent
4. The REIT distributes the Rent to Investors via periodical Dividend.
5. The Capital Value is reflected in the NAV
PLEASE NOTE :
Land: In India, REITs cannot invest in land. But in mature markets, REITs can own raw land and develop it or sell it when they think there is appreciation on the price. Also, there are REITs which invest in land of farming.
TAX ANGLE :
1. Dividends are Tax Free in hands of Investors
2. Short Term Tax (sold within 3 years) is 15% of Gains
3. Long term tax (sold AFTER 3 years) will be at 10% of Gains.
4. Dividends received will be ADDED TO THE INCOME OF INVESTOR AND SHALL BE CHARGED TO TAXED AS INTEREST INCOME
Point No.1 says
Dividends will be taxed in the hands of the Company and not in the hands of Investor (unlike a Dividend of Equity shares which are taxed post 10 lakhs Dividend Income)
Point NO.4 says
The Dividend will be ADDED to the overall income of the Investor and will taxed accordingly.
It could be NIL in case of small investor and even 30% in case of HNIs
Owning a Real Estate is a challange both financially and legal hassles, REITS is an easy simplified asset class to own the same without actually owning it Physically.
2. No Lock-In
You as Investor can enter or exit the REIT as per your wish and conveneince unlike an actual Real Estate which has its own problems
3. You can even sell the REITS in the Stock Markets making it very very liquid. The REITs will be listed on both the NSE AND BSE
4. Since SEBI has mandated that 90% of the Distributable Cash flows must be distributed with the Unit Holders, there is a good scope for regular income.
5. Real Estate is one of the Most non-transparent asset class and REIT aims to reduce that as it is regulared by SEBI and will be managed by Professional Managers (just like Mutual Funds)
6. DEBT ALTERNATIVE
A good alternative to Fixed Deposits and Bonds as the returns in REITS are more or less assured due to regular rents.
7. GEOGRAPHICAL DIVERSIFICATION TOO :
Since REITS will be investing in Different Geographicals and mostly in Rental generating assets, it offers Investors a Good Diversification Option.
8. GOOD SOURCE OF REGULAR INCOME:
REITs are mandated to distribute 90% of profits in form of dividends which is distributed quarterly making REIT a convenient way to have a Steady stream of Interest Income.
1. Huge entry at Rs.2 lakhs. This could impact small investors.
Yes..SEBI has indicated that it will be soon reducing the same to Rs.50,000 but for now its out of bounds for huge number of small investors.
Please note : Once it is listed, trading will be for a minimum lot of Rs 1 lakh.
3. The Average Rental Yield is not very attractive in India at present (at about 5% to 8%).
4. The biggest point you should note is that REITs could be very very volatile. They are not steady and flat. NO Sir !
And Short term performance could be awful.
In fact, in the US, Dow Jones REIT Index fell 17% in 2007 and 39% next year!
SO WHAT SHOULD YOU DO ?
If you your Asset Allocation is skewed towards Equities and needs more of Debt, REIT could make a great alternative asset class.
Going forward, more tighter regulations and more players will only be making REITS a much more attractive asset.
Do not invest as a proxy Real Estate Play (at least not now, as yet)
Another point to be noted is....Motilal Oswal in its note has says that Embassy Reit is priced at 20% DISCOUNT to its NAV and offers a yeild of 8.25% per annum.
And Chairman of CBRE, Anshuman says "We estimate 12% to 14% overall returns over a 5-7 year period"
Some analysts have gone as far to predit a return of 12% to 14% POST TAX !!!
This may seem far-fetched for now, at least
US Reits have given returns around 6% to 8% and shockingly Infrastructure Investment Trusts (similar to REITs) are actually trading BELOW their Offer Price.
So....capital appreciation should not be the criteria to invest.
Interest Income, yes.
So, overall, if you are sure that you are in for LONG TERM, wont mind volatility, want steady cash flows, you can GO AHEAD WITH INVESTING IN EMBASSY REITS.
EMBASSY REITS IPO :
Bangalore based Real Estate Gaint EMBASSY GROUP under its group company EMBASSY OFFICE PARKS, is coming up with India's FIRST ever REIT (Real Estate Investment Trust) aiming to raise around Rs.4750 crores.
The issue has a price band of Rs 299-300 per unit and will close on March 20. The total issue size is 12,95,56,000 units.
Embassy Office Parks is a Joint Venture between the Embassy Group and US Private Equity Gaint BLACKSTONE.
The Embassy Office Parks has about 33 Million Square Feet of Office and Hospitality assets under this REIT spread across 7 properties and 4 cities Mumbai, Bangalore, Pune and Noida.
Minimum Bid is 800 units.
One unit is priced at Rs.300
So minimum bid is at Rs.2.40 lakhs
Multiples of 400 units
Hence multiples in 1.6 lakhs.
1. Out of 33 Million sq foot, 24 million is already operational
2. Out of this 24 million, more than 95% is already operational and yielding a Rental Income of over Rs.2,000 crore annually.
3. Besides, the Embassy REIT will be adding another 42 Million sq foot of property very shortly.
4. Embassy has its properties in the right places namely Bangalore, Noida, Mumbai and Pune.
All highly attractive cities for MNCs.
And especially Bangalore and Noida are growing at DOUBLE DIGIT since 2013.
5. Embassy REIT also has a ROFO (Right of First Offer) for 2 Under construction properties in Chennai and Hyderabad.
NOT SO GOOD THINGS
1. Nearly 49% of Embassy REITs rental incomes from Technology companies which raises a huge concentration risk.
2. Embassy REITs is heavily skewed towards MNCs.
This could cut both ways and especially very badly during Meltdown as MNCs are known to be ruthless when it comes to cost cutting.
WHAT SHOULD YOU DO ?
The anchor book has been in huge demand with investors like
Fidelity, Citigroup, Morgan Stanley, Capital Group, TT International, Schroders, Kotak Mahindra Life Insurance, Damanis already investing huge sums of money.
This shows the apptetite for REITs and an unexplored virgin asset class.
The Net Distributable Cash Flow for Embassy REIT is at a appreciable rate of 8.2% for period between FY 16 and FY 18.
This definitely looks attractive and one can consider going ahead with investing in the EMBASSY REIT.
The returns (albeit in single digits) is more or less assured due to RENTAL income and thus can be considred for DEBT portion of your portfolio.
Do take your Financial Advisor's advise before taking any decision.
All the best.
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