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In the current market scenario, there are many ways one can earn a form of passive income, which can meet the needs of a risk-averse investor, an investor aimed at general capital appreciation through regular returns as well as a newbie who wants to get into the market.
With the ongoing stock market rally, it has injected the market participants with a level of confidence which seems to show a positive correlation to the prices of various stocks and schemes shooting up.
Investment in Money Market instruments, diversification through Mutual Funds, trading through Exchange Traded Funds and Systematic Investment Planning schemes (SIP) are just a few special mentions that appeal to the guarded investor.
Real Estate is one that gets featured in the top few of this list, but is it as lucrative and attractive as it seems to be?
A building or home rental on the face of it seems a steady and sure way of earning income, with fixed payment of rent, an increase of the rent per year or as to what the rent agreement stipulates and if you're in luck, a new friend or a mutually beneficial relationship. There are also various incentives such as tax breaks, setting off losses, and implementation of a modern tenancy law called National Urban Renting Housing Policy that safeguards the needs of urban tenants.
As a way to combat the weaknesses and the cracks of the real estate market, the Indian economy has seen the introduction of REIT: Real Estate Investment Trust, an instrument similar to a Mutual Fund, and one which occupies a substantially large portion of portfolio's and Mutual Fund's in western countries due to its favorable outcome.
A REIT is similar to a Mutual Fund, with a characteristic difference. While Mutual Funds benefit in equity or debt instruments, a REIT solely aims at investing in physical real estate units. The holders of a REIT get a share of the income produced through real estate, in the form of rental payments or capital gains, without ever having to own the property. This allows the investor not to fund or finance the property by himself/herself which could result in large payments through a mortgage or other loan schemes. The risk of the investor is hedged by only investing in the property without being the holder of the property.
The process begins first with the money collected through REIT's IPO and trading. This will be used to finance real estate projects. After it's completion, the money generated through rental, leasing agreements, and general capital gain increase of these projects will be paid to the investor as a form of revenue.
Just like a Mutual Fund, a REIT has a sponsor who invests the money, a trustee that looks over the fund, and a fund manager who makes the investment on behalf of the unit holders.
The REIT has a diverse portfolio that spreads out the risk and is an investment with a long-time horizon. Investors earn returns twice on a yearly basis as well as through capital appreciation. An investor gets more exposure as compared to investing directly in investment property.
The REIT issued by Embassy Office Parks is an equity REIT which means it generates revenue through renting a wide range of property types including shopping centers, apartments, offices, etc.
As advantageous a REIT sounds, it does have a few drawbacks: It trades at a slightly high price may be out of reach for certain investors. It has a relatively long time horizon of 10 - 20 years and as compared to other countries and schemes and 90% of the REIT return has to be distributed where the dividend earned is exempt from tax, but not the interest and rental income owned directly by the REIT. Also, with India just introducing REIT, there is no way to compare it against any benchmark apart from the one it will have set by itself. The introduction of this instrument will see the inception of issue of REIT's from various companies, including Hybrid or Mortgage based REIT's.
The expected yield is aimed at 10 - 14% in the Short and medium-term with the minimum risk being earned. They are of almost negligible volatility as compared to other instruments such as Fixed Deposits, Mutual Funds, etc., as 80% should be invested in rent generating assets. ICRA has given a provisional rating of AAA to REIT's, a top credit rating assuring the investors of its profitability and capability of assured returns and appreciation; the main underlying reason being its diversity - in tenant ownership and asset classes in both domestic and foreign. The regulations imposed are favorable to the credit profile which include its distribution and tax treatment of dividends, and the limitation of leverage.
The first REIT was introduced by Embassy Office Parks, a joint venture between Blackstone Group and Embassy Group. It launched its first IPO on March 18th, 2019. It aimed at earning ₹ 4750 crores, the price band being ₹ 299 - 300 and a minimum application of 800 bids. The Embassy REIT gained almost 8% since it's the opening price of 300 and in the Q3 posted a 9-month income of Rs 16,603 Crore.
Comparative Analysis: REIT Vs AIF
Real estate developers need funds on an ongoing basis to develop the projects and bring it into the market.
Since the Indian banking law does not allow lending to real estate developers for land purchase (basic raw material for development), AIFs will offer necessary capital for the development of key sectors such as housing, commercial, and retail. They will also be able to channelize money (under SEBI guidelines) for the development of the sector. SEBI has allowed AIF to set up in India under a newly formulated route. The route allows the pooling of funds for investments in areas such as real estate, private equity, and hedge funds.
Given the differences, the Indian real estate market is expected to see both, AIF and REIT co-existing in India.
Overall, We see the REIT doing well in the current market scenario, connecting the objectives of infrastructural and industrial development in India and the need for consistency of returns with minimal risk of the investors, with the additional benefit of capital appreciation.
Disclaimer: Investments are subjected to market risks, please consult a registered investment advisor before investing. This article is for knowledge purposes only.
Written By: Rohann Abraham