Real-Estate Investment Trusts
After a year-long gap, the country’s second real-estate investment trust (REIT), Mindspace Business Parks, came out with a public issue recently. Both Embassy and Mindspace are major office REITs in the market. REITs can be structured for any type of real-estate properties such as office REITs, retail (malls), hotel, data centres, infrastructure, and diversified REITs.
What is it?
- REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns. These are usually commercial properties (offices, shopping centres, hotels etc.) that generate rental income.
- An REIT works very much like a mutual fund. It pools funds from a number of investors and invests them in rent-generating properties.
- SEBI requires Indian REITs to be listed on exchanges and to make an initial public offer to raise money.
- Just like MFs, REITs are subject to a three-tier structure — the sponsor who is responsible for setting up the REIT, the fund management company which is responsible for selecting and operating the properties, and the trustee who ensures that the money is managed in the interest of unit-holders.
- One can invest in REITs in primary and secondary market and exit any time he/she wants. But they will have a minimum investment requirement of ₹50,000 for 200 units; this was reduced from ₹2 lakh (800 units) by SEBI to encourage investor participation.
- The Indian real estate sector has been facing a liquidity crunch on account of unsold inventory and low demand. REITs can help cash-strapped developers to monetise their existing property.
- Indian investors do not have too many regular income options. SEBI requires REITs to distribute a minimum 90 per cent of their income earned to investors on a half-yearly basis. Similarly, 90 per cent of sale proceeds too are to be paid out to unit holders unless the amount is reinvested in another property. Thus, an investor can get to receive regular income and also get to benefit from price appreciation, thereby boosting returns.
- In real estate sector, both rent and capital appreciation from property depend on the location, infrastructure and industrial development around that area. REITs juggle these risks through a diversified portfolio of properties.
- If REITs take off, investors can invest in the property market with a minimum amount of ₹50,000, which is far cheaper than buying property. REITs an be a new asset class to explore.
- Further, there is transparency as the investor will also know the valuation of the REIT once in every six months. Many investors buy second or third homes for rental income. REITs could turn out to be a better option on account of their diversification.
- REITs can reduce the risk related to the property investments as 80 per cent of the value of the REIT should be in completed and rent-generating assets. They are required to be run by professional managements with specified years of experience notified by SEBI.