Investing in real estate is an integral part of Indians’ financial planning. In fact, it is looked at as a backup source of income for a lot of Indians. Now the concept of investing in real estate without actually owning it sounds new and tricky for a lot of Indians. Explain to us what kind of property or real estate we are talking about when it comes to REITs? How without owning land physically, one can still be a part of your financial portfolio?
REIT is short for Real Estate Investment Trust. I will simplify it by giving an example of gold. We Indians know gold. We have the highest consumption of gold across the world. We buy physical gold or buy it through sovereign gold bonds or digital gold.
Similarly, one can own real estate properties through REITs which allow us to get regular income the way one can get it from physical lands and commercial properties by renting out those properties. But while dealing with physical lands and commercial properties, lack of liquidity and transparency can be an issue, which can be avoided by dealing in REITs.
REITs have been there for a long time in other global markets like the US but in India, the Securities & Exchanges Board of India (Sebi) started drafting papers for these kinds of investment trusts since 2007 and we got our first REIT listed on the exchange in 2019; it was the Embassy Office Parks REITs.
So over here, we are talking about the lands and also commercial special economic zones, commercial buildings and special economic zones in which we can actually invest but without taking much risk and a lot of liquidity is available.
Secondly, we do not need crores of rupees to invest into it since these are under regulation and under the Sebi framework as all these REITs need to get listed on the exchange. So once they get listed on the exchange, after that one can trade the way trading is done in equities and also other exchange traded funds.
One does not need to have additional funds or a lot of paperwork and at the same time since it is regulated by Sebi, one is getting transparency and also benefits out of it the way one gets the rents from the rental properties. Similarly, we are going to get over here.Let us talk about it one by one. First let us talk about the investment amount. You said you do not have enough liquidity right now but still you want to be a part of real estate or want to make it a portfolio investment. What will be the minimum ticket size? I am sure there is no maximum limit but then what is the ticket size from where it begins?
One can start off with 10,000 to 15,000 as well since these REITs are listed on the exchange. We have three of them as of now, The first is Embassy Office Parks REITs, MindTree and lastly Brookfield. These three REITs are listed on the exchange.
Could you explain about the three REITS further?
Yes the first one is Embassy Office Parks, then second one is MindTree and lastly the Brookfield REIT. All three are listed on exchange and the first two have a market cap of approximately Rs 20,000 crore. The Brookfield REIT was recently listed and has a market cap of Rs 8,000 crore. All these REITs are holding around 30 to 40 million square feet of land and they are getting regular income by way of rent which they are distributing to their investors. The investors are going to get the benefit of these rents in the way of dividend as well interest income.
So earlier it was not Rs 2 lakh minimum investment amount? Has it been revised now?
Yes it has been revised. So just 10,000 to 15,000 per month and you get to invest in real estate and the kind of properties we are talking about are commercial properties?
Yes, those are commercial properties.
And what would be the value of those properties?
As I said, the market cap is Rs 20,000 crore. MindTree and the Embassy Office Parks are trading above their book value. We can say their market value is somewhere around Rs 15,000-20,000 crore.
When we invest in a physical real estate and if at all you want to make an earning out of it, you get a rental income. For someone who is invested in REITs, how is that possible?
You can invest through a demat account. The first REIT was launched in 2019, second one in 2020 and the recent one is Brookfield which was listed in 2022. Anyone having a demat account can just login and invest into REITs.
Tell me something about liquidity. In real estate, we all know liquidity is a huge issue but then if you are going through REITs, what is the flexibility that is provided here?
It is listed on equities. You can buy and sell a unit at any point of time. It allows transparency and flexibility.
If one wants to make REITs a part of their portfolio, what should be the allocation?
It depends on the risk profile. Since these particular assets can give returns in the range of say 7-9%, one will require diversification across all asset classes. This is one of the asset classes wherein you can get some kind of not exactly fixed, but some good return over other debt instruments.
Over a period of time, it can also give you benefit over other investments since this particular investment is directly linked to real estate. So, we are waiting for one of the bills to be introduced in the government in coming sessions. Once that particular bill gets announced, it would benefit all REITs and we may see a good upside in the next few months or coming years.
Can you compare physical real estate and equity as investment options with REITs? In terms of returns and tax implications, what would be the parameters on the basis of which one can compare REITs with physical real estate and equity market?
Physical real estate involves a lot of compliance. On top of it, we have seen recently how builders are defaulting. So the risk is quite high over there in case of physical assets or say in case of actual buying a property anywhere across India. That particular thing is taken care over here since this is through an investment trust where they have to follow a lot of compliances and are regulated through Sebi.
Over here, this particular risk factor is not there. Secondly, the liquidity part is there. If I own a property, tomorrow if I want to get out of it, it is not going to be an easy task. I cannot directly go to any market and sell my property. Over there, once you get these units of REITs, you can just sell it off the way you are selling your shares, mutual funds and ETFs on the exchange. So transparency and liquidity, these two things are there.
How can REIT unitholders keep track of appreciation? Also, what if you just want to come out of this investment? How can a unit holder be aware of all these things?
So every unit holder is like a shareholder of a company over here because since it is listed, Sebi has advised each and every investment trust to quarterly update on their overall activities as well as every quarter, they come out with their earning calls. Then half yearly, they have to provide their market capitalisation to the investors. One can also track the regular results and research notes given by different brokers because we also update on these REITs. Since only three are listed, it is quite easy for us to do some research on this and advise our investors.
Coming to tax implications, the dividends are tax free, interest is taxable and the appreciation if you get in the units will be taxable the way equity shares are treated. If you are selling it within a year then 15% short term capital gains tax and if it is above one year, then 10% long term capital gains tax up to Rs 1 lakh. So the same implication is there like shares and they are following each and every aspect of normal corporates which are getting listed on the exchange.
As you track the equity shares, the same way REITs can be tracked. One can understand how one is making money or how they are going to get benefit from these investments.
Is it possible to invest in international REITs?
As of now, we cannot invest in international REITs. Around 730 listed REITs are there and the market cap for them is somewhere around $11.84 million. But as of now, those are not accessible to us. A few of the mutual funds are allowing it but that is very limited. So if at all we try out that then enough research is not available with us.
Senior citizens or people who do not have a regular income, often depend on rental income. Can they make REIT a part of their regular income in whatever financial scenario they are into?
Yes, definitely. The real estate market in India is really good. If you are selling a property it sometimes gets really good appreciation but the rental yield is quite less. So compared to that, if you are investing into REITs then definitely you will get 6- 9% of regular returns or regular dividends by way of interest from leasing out these properties by the Real Estate Investment Trusts and that is much higher than the yield we are going to get through real estate properties like residential properties.
But in the case of commercial properties, over a period of time, you are going to get returns. The last financial year was not good for the REITs but from here on, we expect that 7-8% of returns would be there which is quite good as compared to the current rental yield available in India.