The REIT Choice
Indias first Real Estate Investment Trust has got a good response from investors. Is it an attractive avenue to park money?
- Apr 1, 2019,
- Updated Apr 4, 2019 4:33 PM IST
Embassy Property Developments, a Bengaluru-based developer, has launched India's first real estate investment trust, or REIT, a full five years after the Securities and Exchange Board of India, or Sebi, came out with the relevant regulations. Called Embassy Office Parks, the REIT plans to raise Rs4,650 crore from its initial public offering. Embassy Property Developments is backed by Blackstone, one of the biggest private equity funds in the world.
REITs are expected to be a game changer for the real estate industry as they will bring the much needed capital and transparency at a time the real estate sector is struggling to raise funds. Investors will get an opportunity to invest in real estate with smaller amounts.
REITs work like mutual funds. The sponsor holds underlying assets (real estate) through a trust. Investors are issued units of REITs which make them a part owner of properties in the portfolio. Right now, REITs can invest only in commercial real estate, either directly or through a special purpose vehicles or SPV. The returns will come from rent and capital appreciation.
Sebi regulations say 80 per cent of a REITs investments should be in completed and revenue generating assets. Also, it should pass 90 per cent rental income to investors; the remaining amount can be utilised for the main business. The Emabassy REIT fares well on this parameter. "Six of the 11 commercial office assets of Embassy Office Parks report over Rs100 crore revenue from operations and only two (out of the 11) do not report any revenue. Hence, the Embassy REIT qualifies the income producing asset criteria as 89 per cent portfolio is operational and generating income. The payout will depend on how the trust decides to distribute the gains, that is, via dividend or rental income," says Purnima Nair, Associate Economist, CARE Ratings.
Globally, over 30 countries have REITs. The US is the most mature market, followed by Australia, Belgium, Canada, France, Germany, Japan, the Netherlands, New Zealand and the United Kingdom. In India, so far, we have only seen one REIT, and in the absence of choices, the returns may not be very high, say experts.
"I will not probably invest in a REIT because it will yield 7-8 per cent (pretax) even though they (Embassy Office Park) are promising 8.5-9 per cent. This is the global trend. REITs in the US, Hong Kong and Australia offer a pretax return of 8.5-9 per cent. And these countries have a much wider choice of assets. So, anything northwards of 8.5 per cent is a dream," says Hemal Mehta, Partner, Deloitte India.
In India where interest rates are high and instruments such as small saving schemes offer close to 8 per cent guaranteed return, REITs will face tough competition. "I have to invest my hard-earned money in a REIT and get a 8-8.5 per cent return with a lot of uncertainty of what legal issues may come up. Compared to this, a bank fixed deposit gives me 7.5 per cent. So, should I take such risk for an additional 75 basis points? In bank deposits, I have liquidity. Here, I am not sure how vibrant the market is going to be. And there is an inherent risk I am carrying," adds Mehta of Deloitte. Although REIT units can be sold on exchanges, it will have to be seen how the units are traded. The volumes may not be high.
Right now, REITs are not very tax efficient compared to other products. There are a few areas which need to be addressed to make them more tax efficient. For example, issue related to stamp duty payment in case of transfer of assets and exemption from DDT on distribution of dividend by SPV to SPV holding company needs to be addressed in order to make it more attractive. REIT is a good product and will give investors the opportunity to diversify across asset classes. But it will take time to evolve. Therefore, retail investors should take time to understand it and see how it performs. Only those who are sure and understand the product well should go ahead and invest.
@renuyadav08
Embassy Property Developments, a Bengaluru-based developer, has launched India's first real estate investment trust, or REIT, a full five years after the Securities and Exchange Board of India, or Sebi, came out with the relevant regulations. Called Embassy Office Parks, the REIT plans to raise Rs4,650 crore from its initial public offering. Embassy Property Developments is backed by Blackstone, one of the biggest private equity funds in the world.
REITs are expected to be a game changer for the real estate industry as they will bring the much needed capital and transparency at a time the real estate sector is struggling to raise funds. Investors will get an opportunity to invest in real estate with smaller amounts.
REITs work like mutual funds. The sponsor holds underlying assets (real estate) through a trust. Investors are issued units of REITs which make them a part owner of properties in the portfolio. Right now, REITs can invest only in commercial real estate, either directly or through a special purpose vehicles or SPV. The returns will come from rent and capital appreciation.
Sebi regulations say 80 per cent of a REITs investments should be in completed and revenue generating assets. Also, it should pass 90 per cent rental income to investors; the remaining amount can be utilised for the main business. The Emabassy REIT fares well on this parameter. "Six of the 11 commercial office assets of Embassy Office Parks report over Rs100 crore revenue from operations and only two (out of the 11) do not report any revenue. Hence, the Embassy REIT qualifies the income producing asset criteria as 89 per cent portfolio is operational and generating income. The payout will depend on how the trust decides to distribute the gains, that is, via dividend or rental income," says Purnima Nair, Associate Economist, CARE Ratings.
Globally, over 30 countries have REITs. The US is the most mature market, followed by Australia, Belgium, Canada, France, Germany, Japan, the Netherlands, New Zealand and the United Kingdom. In India, so far, we have only seen one REIT, and in the absence of choices, the returns may not be very high, say experts.
"I will not probably invest in a REIT because it will yield 7-8 per cent (pretax) even though they (Embassy Office Park) are promising 8.5-9 per cent. This is the global trend. REITs in the US, Hong Kong and Australia offer a pretax return of 8.5-9 per cent. And these countries have a much wider choice of assets. So, anything northwards of 8.5 per cent is a dream," says Hemal Mehta, Partner, Deloitte India.
In India where interest rates are high and instruments such as small saving schemes offer close to 8 per cent guaranteed return, REITs will face tough competition. "I have to invest my hard-earned money in a REIT and get a 8-8.5 per cent return with a lot of uncertainty of what legal issues may come up. Compared to this, a bank fixed deposit gives me 7.5 per cent. So, should I take such risk for an additional 75 basis points? In bank deposits, I have liquidity. Here, I am not sure how vibrant the market is going to be. And there is an inherent risk I am carrying," adds Mehta of Deloitte. Although REIT units can be sold on exchanges, it will have to be seen how the units are traded. The volumes may not be high.
Right now, REITs are not very tax efficient compared to other products. There are a few areas which need to be addressed to make them more tax efficient. For example, issue related to stamp duty payment in case of transfer of assets and exemption from DDT on distribution of dividend by SPV to SPV holding company needs to be addressed in order to make it more attractive. REIT is a good product and will give investors the opportunity to diversify across asset classes. But it will take time to evolve. Therefore, retail investors should take time to understand it and see how it performs. Only those who are sure and understand the product well should go ahead and invest.
@renuyadav08