With the mere mention of real estate investment, you might be thinking of arranging a large amount of money for down payment, getting home loan at a cheaper rate and paying EMIs for around 20 years, and so on.
With the mere mention of real estate investment, you might be thinking of arranging a large amount of money for down payment, getting home loan at a cheaper rate and paying EMIs for around 20 years, and so on. But don’t worry. The introduction of Real Estate Investment Trusts (REITs) has made it possible now to make money without going through the hassles of buying a property.
Like mutual funds (MFs), REITs pool funds from a large number of investors and invest the money in rent-generating properties, which are usually commercial properties like offices, shopping centres, hotels etc.
To make the investors’ money safe, REITs also have a three-tier structure — (i) a sponsor who is responsible for setting up the REIT, (ii) a fund management company which is responsible for selecting and operating the properties, and (iii) a trustee who ensures that the money is managed in the interest of unit holders.
The minimum offer size of REITs is kept at Rs 250 crore and as per SEBI guidelines, the trusts have to be listed on exchanges and to make an initial public offer to raise money.
So, an investor may investment a minimum Rs 2 lakh in REITs in primary and secondary markets and exit any time they want.
With the listing of India’s first REIT by Blackstone-backed Embassy Group around the corner – probably within the first half of 2019 – investors hoping to cash on this new avenue for generous ROI growth seek to understand what exactly is in store for them.
According to ANAROCK Capital MD & CEO Shobhit Agarwal, “In India, the projected five-year returns on commercial assets is an optimistic 14 per cent, largely because Grade A commercial real estate has been on a protracted winning streak since 2017.”
However, it is the commercial real estate that withstood the vagaries of the various reforms much better than the residential asset class, and lack of a sound and inclusive rental policy in India is one of the major hurdles for REITs in the residential segment.
ANAROCK data also indicates that while commercial real estate supply across the top seven cities in 2017 (post the disruptive reformatory changes of DeMo, RERA and GST) declined by 24 per cent over the preceding year, 2018 saw a 21 per cent jump in new commercial supply as against 2017. Office space absorption remained steady with top seven cities, witnessing an increase of almost 5 per cent in 2017 as against 2016, and a 19 per cent increase in 2018 as compared to 2017.
The data currently suggests that approximately 50 per cent of the total office stock in India can qualify for REITs – a definite improvement over the 30 per cent two years ago. Clearly, the market is gearing up for the launch of REITs by developing investable commercial assets.
However, cautioning the prospective investors, Agarwal said, “Once REITs become an on-ground reality, the market must remain vigilant. There could be a major issue for Indian REITs if the supply of investment-grade office spaces does not keep pace with demand. If it doesn’t, we will see an asset bubble form in the short-to-mid term.”