A real estate investment trust is a company that owns and in most cases operates, income producing real estate. Real Estate Investment trust own many types of commercial real estate ranging from office and apartment buildings to warehouses, hospitals etc.
In 2014 , India approved the creation of real estate investment trusts in the country. The purpose is to help the individual investors enjoy the benefits of the securitised real estate market. Traditionally the acquisition and disposal of real estate assets are time consuming and difficult, and many of the possible investors vary on investing in real estate market due to this reason. The creation of Real Estate Investment Trust will be a great benefit for the fast and easy liquidation of real estate assets. Government of India and Securities Exchange Board of India through various legislations and notifications making it easier to invest in real estate directly and indirectly through Foreign Direct Investments, listed companies and mutual funds. The reason why it delayed this much is the black spots on tax implications on the income earned and some other facts.
Indian investors will witness a first-of-its-kind IPO today as the country’s first REIT (Real estate investment trust) hit the primary market. The REIT is a joint venture of private equity giant Blackstone Group and Bengaluru-based real-estate developer Embassy Group and is officially called the Embassy Office Parks REIT.
Once more what is REIT?
A REIT is similar to a mutual fund in that they pool money and invest in income-generating assets. But what makes REIT different from mutual funds is that it only invests in large-scale real-estate projects such as office buildings, hotels, warehouses, and apartments.
So basically, REITs are linked to real-estate and can be traded on the stock exchange if it listed.
As in the securities market, In a REIT, investors make returns on their investment based on the performance of the market. This yield is driven by the profit made by the real-estate property and an increase in the asset’s value. So a REIT provides for regular dividend which is in proportion to the profit the property makes.
Real-estate is a high-ticket investment and hence always a deterrent for the retail investors. Now, with the introduction of REIT, these instruments allow investors to invest in high-end commercial real-estate without physically owning it. The minimum investment amount for the IPO is 2 lakh rupees, as the issue was finalised before March 2019, ironically SEBI reduced the minimum amount to Rs 50000 on 1stMarch 2019.
Details of IPO
The REIT’s portfolio comprises of close to 33 million sq. ft of office space which is spread out across the cities of Pune, Mumbai, Bengaluru, and Noida. It also includes the famous Express Towers ( at Nariman Point) and First International Finance Centre (in the Bandra-Kurla complex).
The trust plans to raise Rs.4,750 crore (making it the largest public offering for this year) through the sale of close to 15.83 crore units at Rs.299–300 per unit, of which 12.9 crore units are assigned for public investors while the rest will be offered to strategic investors.
The minimum lot size is 800 units, beyond which the investor can buy in multiples of 400. This means that an investor must make a minimum investment of about Rs.2.4 lakh.
On 1st March 2019, the minimum investment criteria was lowered by the SEBI to Rs.50,000 from Rs.2 lakh earlier. Since Embassy Office Parks REIT IPO was filed in September last year, it is still subject to the old specifications.
The IPO will remain open till March 20. The funds raised through this IPO will be utilized primarily for repayment of Embassy’s debt, which currently stands at Rs.8554 crores.
Advantages and disadvantages
As this is the first REIT in India and fund houses do not have historical data, they are reluctant to suggest this as an investment option for retail investors. But if this REIT is successful, various others may follow soon and this will provide a fund-raising option for the struggling property companies.
This is the first time retail investors get to enter the real-estate sector and own physical assets.
The returns on commercial properties range between 8–10% and commercial spaces in premier locations provide higher returns. The Embassy Office Parks REIT is expected to provide a return of about 8.25% to 8.28%.
The entry point of Rs. 2.4 lakhs is huge.
Nearly 60% of their properties lie in Bangalore alone, which can carry a geographical risk.
Returns come to investors who are willing to stay for the long boom/bust cycles that the industry is known for.
As this is real estate investments, staying invested long term makes sense for income, so the investor should be patient on investments with long horizon, Even we can say the REIT may be less volatile than securities market, the long terms investment aspect makes the investment more volatile. Regulations says that 80% of the investments of REIT should be in rent generating assets, the volatility may be limited.
There are three types of incomes a REIT can distribute, dividend, interest or rent. SEBI regulations says that the REIT should distribute 90% or more of the earnings to investors or unit holders at least twice a year. All incomes in the form of dividend is tax free at the hands of recipient, incomes by way of interest on investments and rent will be taxable as other income. Ordinarily most of the incomes distributed by the REIT will be in the form of dividend it will be tax free for the investor.