Let’s understand what a REIT is.
REIT is a financial institution which buys income generating properties and pays that income to the investors who have provided the funds to buy the property. In a way, it works just like a mutual fund would. Multiple REITs pool in the funds provided by the investors (i.e. common public) and buy the properties with those funds. (Of course, REIT Fund Managers charge commissions for their services, just like a Mutual Fund Manager.)
Where can you buy REIT units?
Just like shares, REITs are listed and bought & sold at the stock exchange.
Why is there a need for REIT units?
- Access to commercial properties- REITs generally buy plush commercial properties, which is almost impossible for an average investor to get her/his hands on. REIT units offer a unique way for small investors to profit from the increasing prices and rentals on these highly expensive properties.
- Small investment- Since only a very small part of the property is bought, investment/capital required is low.
- Assured monthly income and a chance to gain from rising property prices- Monthly rentals provide fixed income, and there are always chances of earning an abnormally high profit from the capital appreciation of the property. Thus, an investor is limiting her/his financial risk while keeping no cap on the returns.
Scenario of REITs in India
As of now, only 2 REITs are listed on the stock exchange in India namely Embassy REIT and Mindspace REIT.
This is the first REIT to ever be listed on the Indian stock exchange that came live in the markets on 1st April, 2019. It was listed at a price of Rs. 314/REIT, backed by Blackstone Group, and raised close to Rs. 5000 crores in funds. It owns 33.3 million square feet (msf) of office space in cities like Bengaluru, Mumbai, Pune and NCR.
- Minimum investment = 400 (Min. REITs one has to buy in one single transaction) *370 (current REIT price) = Rs. 1.5 lacs approximately.
Embassy REIT hit a high price of Rs. 512/REIT in March 2020, but the price has been falling ever since due to the uncertainties brought by Covid-19. It is currently trading at Rs. 370/REIT (as of 18th Aug, 2020) and thus has not given very handsome returns since its listing.
This other listed REIT has an office space of 23 million square feet with properties listed over the cities like Mumbai, Pune, Hyderabad and Chennai. It has over 170 tenants with more than 92% of its properties given on leases. It was listed at a price of Rs. 304/REIT and is trading at Rs. 301/REIT.
- Minimum investment = 200(market lot size) * 301(current REIT price) = Rs. 60,000 approximately.
Cannot be commented upon since not a substantial amount of time has passed since its listing.
India is moving towards more and more innovative financial products to improve liquidity in the real estate sector, especially in commercial properties. However, residential REITs are still a distant future since that particular sector is highly unorganised and fragmented in India.
Commercial REITs’ future performance looks uncertain due to Corona since the opening dates of offices are now known and moreover, the fact that work from home culture just might become a forever norm in certain sectors. Its performance can only be estimated fairly once the Covid-19 situation settles down.
(This article is not meant to provide any financial advice.)
Drishti SinghFinance Enthusiast | Management Student
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