For over a century real estate investment is one of the favorite investment for Indians though it is not possible for all segments of people to invest. It is the conviction of Indians that real estate investment is the safest and highest rewarding investment. But the requirement of huge investment and difficulty in identifying the right property and right price were the biggest issues facing the investors. At the backdrop of this and with a view to providing all types of investors access to income generating properties, Securities and Exchange Board of India (SEBI) recently allowed “Real Estate Investment Trusts” (REITs) in India.
A Real Estate Investment Trust (REIT) is a company that owns and operates properties that generate income by way of rent or lease. REITs own different types of properties such as commercial buildings, apartments, hospitals etc. It will also engage in buying and selling of properties and financing of real estate.
By structure, REITs are similar to mutual funds and based on the activity the REIT is engaged in, it can be classified as equity REIT or mortgage REIT or hybrid REIT according to CARE Ratings. A REIT that buys and owns properties that generate income and or engaged in buying and selling of properties are called equity REITs and the one that is engaged in the financing of real estate projects are known as mortgage REITs. And the hybrid REIT is the one that is engaged in both the activities of equity and mortgage REITs.
Similar to mutual funds, REITs are structured with three parts – sponsors who invest the money, fund manager who decides the investment in properties and trustee who safeguards the interest of the unitholders.
SEBI mandates REITs to raise money through initial public offering and lists at stock exchanges. It mandates REITs to invest 80% of its funds in completed and income-generating properties. It also mandates to distribute 90% of the income so generated to investors on half yearly basis. Hence, along with income investors can also be benefited by capital appreciation as the REITs are listed and traded in stock exchanges. By investing in REITs, retail investors can have access to large properties, which otherwise is not possible for them to buy individually.
In India, for the first time, a REIT “Embassy Office Parks”, a joint venture of US private equity firm Blackstone group and Embassy group raised Rs.4750 crores via an initial public offering in March 2019. The REIT was listed in NSE and BSE on April 1, 2019. It gained 5% on debut and closed the day up 4.7% at 314.10 at BSE. The success of Embassy Office Park REIT opens the way to many more issues in future.
Benefits of REITS
REITs offers opportunity to invest in large and high-quality properties.
Investment required is low
It provides liquidity enabling the investors to exit any time.
It provides diversification to investors portfolio.
It generates income as well as capital appreciation
With the introduction of REITs, not only investors will be benefited, it also provides relief to real estate companies who are otherwise saddled with liquidity crunch. REITs which was pioneered in USA proved to be successful model in other countries such as Canada and Singapore as well. In India, however, the growth of REIT depends upon many factors such as proper valuation of properties and availability of good quality commercial properties. But financial experts are overwhelmed by the introduction of REITs and success of recent IPO of Embassy Office Park REIT.