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Real Estate Investment Trust (REIT) IPO Explained

Published on Tuesday, March 12, 2019 by Chittorgarh.com Team | Modified on Wednesday, May 22, 2019

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Real Estate Investment Trust (REIT) IPO Explained

Real Estate Investment Trust (REIT) is an investment vehicle that owns & manages investment grade and income-producing real estates properties such as offices, malls, industrial parks, warehouses, hospitality, healthcare centers, and almost any asset that can produce an annuity revenue stream. Similar to mutual funds in which funds are raised from investors for investing in equity stocks, REITs raise a pool of funds for investment in rent-yielding assets.

The share holders of a REIT earn a share of the income produced through real estate investment - without actually having to go out and buy, manage or finance the property.

In ReIT, by leasing space and collecting rent on its real estate, the company generates income which is then paid out to shareholders in the form of dividends. ReIT's must pay out at least 90 percent of their taxable income to shareholders. Most of them pay out 100%.

REITs are similar to Infrastructure investment trusts (InvIT). While REIT invests in rental properties like office or shops, InvIT invests in long-term infrastructure projects like roads or airports.

REIT Facts

  • The REIT minimum investment has been kept at Rs 2 lakh per investor in REIT.
  • Once listed on the stock exchanges, trading is allowed for a minimum lot of Rs 1 lakh. Investors can buy/sell REIT's through their stockbrokers.
  • As per the SEBI rules, at least 80 percent of the value of the REIT assets shall be in completed and revenue generating properties.
  • REIT investment is allowed only in commercial real estate assets.
  • Embassy Office Parks REIT is India's first Real Estate Investment Trust getting listed at stock exchanges.

Advantages of REIT's

  • Dividend income

    REITs have to pay at least 90% of net earnings to unit holders as dividend. Most of the gains generated through rental income and capital gains are distributed among investors giving them regular flow of income.

  • Diversification

    REITs help investors diversify portfolio, as they have low correlation to equity, debt and other assets class.

  • Transparent

    Like public listed companies, REITs must disclose financial information to investors, report on material business developments and risks on a timely basis. Since REITs distribute most of earnings, they frequently seek funding from capital markets, which require them to make additional disclosure and justify plans for using such funds.

    Also, since REITs are listed on stock exchanges, investors can seek performance history and get all the necessary details to make investments.

Disadvantages of REIT's

  • Tax on dividend

    Earnings from REITs are taxed at the marginal rate of taxation making it less attractive.

  • Limited growth

    REITs exhibit limited growth, as they have to distribute 90% of income. Thus, REITs can reinvest 10% of its income indicating lower compounding effect.

  • Investment risks

    The standard risks of real estate market such as property values, interest rates on loans, location and tax laws are applicable to REITs.

  • High expenses

    REITs charge management and transaction fees. There are instances where REITs have put a limit on redemption too.

FAQ's

  1. 1. What are REIT (Real Estate Investment Trust) in India?

    A Real Estate Investment Trust (REIT) is an investment vehicle that owns & operates real estate related assets. REIT allows individual investors to earn income produced through ownership of commercial real estate without actually having to buy any assets.

    REIT may own and manage hotels, hospitals and convention centres and even common infrastructure for composite real estate projects such as industrial parks and SEZs.

    Discuss this question

  2. 2. What are the benefits of investment in REIT?

    • REIT is an investment tool that owns and operates rent-yielding real estate assets.
    • It allows individual investors to make an investment in real estate without owning it and earn an income.
    • REIT's are listed at the stock exchange. They can be traded like stock and NCD's.
    • REIT is an alternative investment option for long-term in real estate.
    • Income earned by REIT could be through rentals or capital gains or both, and it gets distributed to unitholders.
    • SEBI rules state that REITs shall distribute not less than 90 percent of the net distributable cash flows to its investors at least on a half-yearly basis.
    • REIT's offer regular and higher distributions compared to dividend on listed equity,
    • They offer higher liquidity and transparency than direct investment in real estate
    • They offer exposure to well-diversified real estate portfolio thus providing better risk mitigation.
    • REITs provide real estate ownership at an affordable ticket size. You could invest as low as Rs 2 Lacs.
    • REITs are professionally managed assets. REIT Managers are required to have at least 5 years of experience in property management.
    • REITs provide stable income and certain yield as 80% of REIT assets are income generating properties that have long term rental contracts.
    • REIT's are better insulated from regulatory/ political risks
    • REIT's are more accessible to small investors and likely to have higher liquidity.

    Discuss this question

  3. 3. What is the difference between REIT and InvIT?

    Infrastructure investment trusts (InvIT) are investment trusts designed to pool small sums of money from a number of investors to invest in assets that give cash flow over a period of time. They are similar to REIT but invest in infrastructure projects such as roads or highways which take some time to generate steady cash flows.

    Real Estate Investment Trust (REIT) is an investment vehicle that owns & manages investment grade and income-producing real estates properties such as offices, malls, industrial parks, warehouses, hospitality, healthcare centers, and almost any asset that can produce an annuity revenue stream.

    REIT Vs InvIT

    CriteriaREITInvIT

    Income Stability

    REITs provide stable income and certain yield as 80% of REIT assets are income generating properties that have long term rental contracts.

    InvITs Cash flows are less certain as they are dependent on various factors affecting their daily capacity utilization and scalability of tariffs.

    Regulatory/ political risks

    REITs are better insulated from regulatory/ political risks. REITs hold land and buildings with on a freehold basis or on lease from a government authority.

    InvITs have the concessions given on infrastructure projects which are more prone to regulatory changes and political interference

    Property Ownership

    REIT's underlying assets see growth in value over time and have high terminal value. REITs own the property leased out whose value grows over time like all real estate classes

    InvITs comprise of concessions where the projects are returned to the authority or are rebid post the concession period.

    Visibility of Growth

    REITs has greater visibility of growth which can be achieved through the redevelopment of existing assets, new construction, and acquisition of completed/ leased assets.

    InvITs, growth depends on the successful acquisition of concession assets through a bidding process.

    Liquidity

    REITs are more accessible to small investors and have higher liquidity due to lower unit price and trading lot.

    InvITs has bigger trading lot size and thus poor liquidity.

    Discuss this question

  4. 4. Can I buy/sell REIT's from the stock market?

    Yes, listed REIT's are tradable instruments. Investors can buy/sell them in the lot size of Rs 1 lakh. The process of buying and selling through a stockbroker is similar to buying the stocks.

    Discuss this question

  5. 5. How investors earn money from REIT?

    REIT earn income through rentals or capital gains on selling some of their properties. The money earned is equally distributed to the REIT unit-holders. The earnings are distributed as a dividend on a half-yearly basis.

    Discuss this question

  6. 6. Who can invest in REIT in India?

    An investor can invest as low as Rs 2 lakh in REIT.

    The projected return on investment in REIT is between 8% to 14% annually with minimum risks. REITs are less volatile than the stock market, FDs, mutual funds and gold because as per regulations 80% of the REITs must be of rent-generating assets.

    The rents for properties owned by REIT are very likely to rise steadily over the years. This is similar to owning a property, earn the rentals and enjoy the appreciation in the property prices.

    A realistic return on investment expectation would be in the range of 7-8% annually, after adjusting the fund management fee. Investors can earn two types of income from REITs; through capital gains on the sale of REIT units and a dividend income.

    Discuss this question

  7. 7. What you should look for before investing in REIT?

    • Most REIT's specialize in a certain segment, which you can find in the fund summary. Understand the risks of each sector. For example, REIT's holding undeveloped land carry more risk than REITs investing in high-end apartments in a major metropolis.
    • REIT's should pay a dividend from operations. At times, REIT's use the additional capital to fund dividends due to stressed assets.
    • Timing the investment in real estate is the key to making money. If REIT was created after a housing market recession; it could own and buy valuable properties at low prices.

    Discuss this question

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4 Comments

Ankur
4. Ankur  Mar 12, 2019 20:02 Reply
IRB InvIT is traded at lowest price. It was issued at 102 and now trading at 66.
Team Chittorgarh.com
4.1. Team Chittorgarh.com  Mar 13, 2019 09:20
Hi Ankur,

Though they fall under the real estate / infrastructure category, the REIT and InvIT are quite different in terms of risk and rewards.

Please read the difference in the above article. Its difficult to compare the returns of IRB InvIT.
Niren
4.2. Niren  Mar 15, 2019 19:14
In InvIT along with dividend declared there is return of capital which is also why the price is coming down. In REIT is there any return of capital along with dividend or only capital gains on sale of property is distributed?
Johny
3. Johny  Mar 13, 2019 10:09 Reply
Top Contributor Top Contributor (300+ Posts, 300+ Likes)
Thank you @Admin
Ankur
2. Ankur  Mar 12, 2019 19:26 Reply
What is chance of default on payment of principal and interest.

Are these reit rated by some rating agencies?
Team Chittorgarh.com
2.1. Team Chittorgarh.com  Mar 13, 2019 09:52
Hi Ankur,
The Embassy REIT has been given a long-term rating of [ICRA] AAA by ICRA. The outlook on the assigned rating is 'Stable'.
Johny
1. Johny  Mar 12, 2019 19:53 Reply
Top Contributor Top Contributor (300+ Posts, 300+ Likes)
@Admin
1) How are profits distributed - interest, dividend?
2) How is capital gain\loss on sale of this units treated?
Team Chittorgarh.com
5.1. Team Chittorgarh.com  Mar 12, 2019 19:58
1. Profits are distributed through dividends.

2. Capital gain/loss are pretty similar to stocks. But as its just the beginning, the rapid changes are expected in regulations regarding this.



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