REITs or real estate investment trust funds work similarly to mutual funds or exchange-traded funds, except REITs invest in income-generating real estate.
The main advantage of these trusts is that they earn from the real estate market without buying or maintaining these properties.
India currently has 3 REITs and 2 InvITs or Infrastructure Investment trusts listed with SEBI. The only difference between the two is the asset type under consideration.
REITs would own and operate a commercial space while InvITs invest in infrastructure.
Why invest in real estate investment trust funds?
From an investor’s point of view, apart from the decreased responsibility of maintaining the property, REITs offer quick and easy liquidation, basically overcoming all limitations holding a physical property for investment purposes would entail.
REITs can be considered a steady income source in high inflation as they offer risk-adjusted returns while helping diversify one’s portfolio.
From the government’s point of view, the rate of infrastructure development is a measure of the country’s growth.
REITs are relatively cheaper and more accessible than investing in real estate, making it easy to invite investors.
Furthermore, REITs ensure concrete structuring of the real-estate financing industry. With the recent relaxation in REIT compliance rules, the Indian government wants foreign fund managers to relocate to India.
How can you lose money in a Real estate investment trust fund?
While there always exists a certain amount of risk in every investment, each type of REIT has its limitations which we look into going further.
A standard limitation that all REITs face regardless of the asset investment is the slow return on investment. Since the model works on the capital appreciation and rental yield, REITs are susceptible to market fluctuations.
Types of REITs and how to invest in them?
Although there can be many bifurcations to the types of REITs, we categorize them on the basis of infrastructure –
1. Retail REITs
Such trusts have heavy investments in freestanding retail or shopping complexes. Given retail would require a considerable amount towards the maintenance of the property, it won’t be a surprise if most of these structures are owned or/and managed by REITs.
The majority of the income from these investments is from the rents that tenants pay. Hence, we advised seeking strong anchor tenants to avoid the end of these stores (e.g., grocery stores or home improvement stores typically experience an excellent cash flow).
While investing in retail REITs, the REITs themselves must have a strong balance sheet, preferably with less short-term debt. In case of economic disturbance, REITs with a significant cash position have the advantage of increasing their portfolio.
2. Residential REITs
Residential REITs majorly earn from rents from tenants. The rent collected from these properties depends on how popular the areas are
Typically, areas where renting a house is more affordable than owning one are the ones that would yield higher returns. As a result, trusts in this category tend to focus on large urban centers.
REITs to look out for should have the most available capital and strong cash flows. As long as the demand for residential properties keeps rising and the supply remains low, the portfolio should yield good returns.
3. Healthcare REITs
However new the concept of healthcare REITs is, as the healthcare cost and average Indian age continue to climb, healthcare REITs would continue to gain popularity.
In the case of healthcare REITs, apart from the infrastructure and occupancy fees, REITs rely on Medicare and Medicaid reimbursement and private pay.
An ideal option for such REIT would be a company with high, low-cost capital and a strong balance sheet on top of well-diversified property types and customers.
4. Office REITs
Since these depend heavily on long-term leases, any factor that would affect a tenant economically would affect the performance of the overall portfolio, i.e. unemployment rate, state of the economy, and other things.
Other factors to look out for would be the location of the properties and the capital available for acquisitions. A REIT that invests in average properties in Mumbai would fare better than luxurious office space in Udaipur.
5. Mortgage REITs
Such REITs invest in, you guessed it, Mortgages instead of equity. Mortgage REITs lend money to real estate either through loans or through the acquisition of mortgage-backed securities.
The risk to such investments lies in increased interest rates, leading to a decrease in the mortgage REIT book value and hence decreasing the stock prices. Furthermore, an increased interest rate leads to more expensive financing and reduced weight of a portfolio of loans.
In a low-interest-rate environment, most REITs would trade at a discount to net asset value per share when there is a possibility of an increase in interest rate.
Listed REITs and InvITs in India
1. Embassy REIT (2017)
The company owns and operates 42.6 million square feet of infrastructure, office parks, and buildings. The properties under their portfolio are in Pune, Mumbai and Bengaluru, and the National capital region.
2. Mindspace REIT (2020)
Managed by K Raheja Corp Investment Managers LLP., the total leasable area under management is 31.3 million sq. ft. Their portfolio is well-diversified into business and IT parks spread across the main commercial hubs in India.
It is well-established in Mumbai, Pune, Hyderabad, and Chennai.
3. Brookfield India Real Estate Trust (2019)
Being the only institutionally managed REIT, Brookfield operates in Kolkata, Gurgaon, Mumbai, and Noida. The trust’s portfolio covers 18.6 million sq. ft of commercial real estate.
4. IndiGrid Trust (2016)
IndiGrid is one of the first movers in the Infrastructure Investment Trust (InvIT) in the power transmission sector. Ingrid owns and manages power transmission networks and renewable energy assets throughout India.
Seven thousand five hundred seventy circuit kilometers of transmission lines and 13,550 MVA transformation capacity make IndiGrid the most significant Power transmission-based InvIT in India.
5. IRB InvIT Fund (2017)
IRB Fund invests in infrastructure development and construction in the roads and highway sector under the sponsorship of IRB infrastructure developers Limited.
It is listed with India’s Securities and Exchange Board since 2008. It has owned and maintained six toll roads in Maharashtra, Karnataka, Gujrat, Tamil Nadu, and Rajasthan.
Lastly, although REITs offer a slow return on investments, they offer as high as 90% of their income as dividends. Being regulated by SEBI and disclosed capital portfolio makes it a safe bet.
FAQs
How can I invest in REIT directly in India?
REITs or real estate investment trust funds work similarly to mutual funds or exchange-traded funds, except REITs invest in income-generating real estate.
Investing in REITs means buying certain units of stock on the stock market, so you need a DEMAT account to invest in REITs.
Can you lose money in REITs?
While there always exists a certain amount of risk in every investment, each type of REIT has its limitations. A standard limitation that all REITs face, regardless of the asset investment, is the slow return on investment.
Since the model works on the capital appreciation and rental yield, REITs are susceptible to market fluctuations.
Is REIT safer than stocks?
REITs can be considered a steady income source in high inflation as they offer risk-adjusted returns while helping diversify one’s portfolio.
REITs are relatively cheaper and more accessible than investing in real estate, making it easy to invite investors. REITs have historically given competitive returns.
How do beginners invest in REITs?
Any investor needs a DEMAT account to buy stocks on the stock market. It is important to know the stock in detail before making an investment. Conduct extensive research before investing in any stocks.
It would be safe for a beginner to consult a financial expert before making an investment.
