REIT Investing in India: Meaning, Examples, Best REIT Stocks in 2022

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What is REIT?

REIT is a relatively new term in stock market terminology but REIT investing in India is surely picking up momentum. REIT is an abbreviation, which stands for Real Estate Investment Trust. In simple words, REITs are investment vehicles that invest in income generating real estates and distribute major chunk of their income with unitholders. REITs own real estates and generate income from them. Some of these REIT companies have good growth potential. In this article we will try to find the best REIT stocks and how to benefit from investing in those companies.

REIT Investing

The first REIT in India was established in 2019. Within next two years, the count increased to three – Embassy REIT, Brookfield REIT and Mindspace REIT. Currently, REITs are gaining popularity fast among the retail and institutional investors.

How does a REIT function?

A REIT is owned or created by a sponsor. The sponsor transfers ownership of own real estate to the REIT in exchange of equivalent units from the company. This real estate can be in a variety of forms including residential apartment complex, office complexes, shopping malls, health care facilities, hotels etc. A REIT is a tax efficient investment vehicle that generates income from real estates.

A REIT functions like a mutual fund company. But instead of units that is offered by a mutual fund company, REITs transfer part of ownership of real estates in possession to their investors.

A REIT shares profit with its investors through capital appreciation. In addition they share their profit as dividends earned through rents and lease from high value real estate properties.

How does a company qualify as a REIT?

SEBI has laid out the following rules to be followed by a company to qualify as a REIT.

  • REITs must pay 90% of distributable cash to their unit holders.
  • To decrease the execution risks, SEBI regulations require the REITs to own 80% of the assets to be completed and income generating.
  • In a REIT IPO, the sponsors of the REITs must keep a specific amount of unit to themselves and the rest to be issued to investors.
  • After listing, REITs must serve as permanent vehicles for investment. REITs can raise capital through debt and equity. These cash inflows are required by these companies to acquire new assets and grow.

Types of REIT

There are different types of REITs found in the market. The differentiation is made on the basis of business they are involved with and methods by which they trade their shares.

Equity

This type of REIT is most common and most popular also. These REITs invest in income generating residential as well as commercial properties. Their main source of income is through the rent of properties they own.

Mortgage

Also known as mREITs, these REIT companies lend money in exchange of mortgage backed properties. They generate income from interest accrued from money lending.

Hybrid

This is a combination of Equity and mortgage REITs. They generate income from property rent as well as interest earned from money lending.

Private REIT

Private REITs are not listed entities. They only cater to selective investors and generate income from private placement of funds.

Public traded REIT

These REITs are enlisted entities. They are authorized by SEBI to float shares/units in the market. Traders and investors can trade these units on stock exchanges just like equity shares.

Public non-traded REIT

The public non-traded REITs are entities registered with SEBI but their shares are not traded on stock exchanges like NSE or BSE. For this reason, their shares are not affected by day to day market fluctuations and are more stable comparatively.

How to chose best REIT stocks?

An investor needs to know what to look for before picking the best REIT stocks. SEBI has already put a guideline stating that the REITs are required to own 80% of the assets to be completed and income generating to decrease execution risk. Here are some additional parameters that are considered as standard for an ideal REIT.

  • Occupancy Percentage – High tenant occupancy percentage is a good indicator for future stability and profitability.
  • Sectoral Diversification – To minimize vacancy rate, properties rented in diversified sectors is important.
  • Tenant Quality – Properties in booming sectors like Pharma, Manufacturing, IT increases the efficiency of a REIT.
  • Tenant Quantity – High number of tenants is a good indicator of reduced vacancy level REIT. Instead of having few tenants occupying big spaces, high number of tenants occupying smaller spaces increases profitability.
  • Geographical Diversification – It is another important aspect to look for. Owning properties in different cities or different micro markets decreases vacancy risks.
  • Dividend Yield – High dividend yield is preferred as most of REIT investing is dividend investing.
  • Growth in Revenue – Rental income growth, profit growth, portfolio value growth are good indicators of efficiency of a REIT.
  • Past Performance – Past annual, six-monthly and quarterly performances should be checked individually and in consolidated form to understand the momentum of growth of the REIT.
  • Weighted Average Lease Expiry (WALE) – Higher WALE indicates more stability and less vacancy risk. The average lease tenure remaining for the tenants is considered for this indicator.
  • Brand/ Developer name – Higher brand value or a trustworthy developer having decent past records in real estate development and fund management ensures profitability and stability.

How to invest in REIT stocks?

After learning about the basics of REIT investing in India, the next natural question that arises is how to invest in best REIT stocks? Thankfully, this is kind of straightforward as of now.

Currently, in India, we have three REIT options for investment that are publicly traded. The following chart provides their recent price performances. Apart from the price performance, investors should look into the parameters stated above before investing.

Please note that this price performance doesn’t capture dividend payouts which is the main reason behind REIT investing. The quest to find best REIT stocks should not be solely based on one parameter but should be a mix of factors like occupancy, dividend yield and taxation.

Pros and Cons of REIT investing in India

Pros

  • Extreme liquidity – Investment can be withdrawn anytime through exchange
  • Affordable pricing – One can start investing in real estate from INR300 to INR500 (per unit price)
  • Safety of investment – Investment is secured because the REITs are regulated by SEBI
  • Dual income advantage – Investor can earn through dividends and capital appreciation
  • Diversified investment – One can invest in real estates in major cities
  • Tax benefit – REIT investing is all about dividends and this income from certain REITs is exempted from tax

Cons

  • Vacancy loss – Unoccupied space doesn’t generate income. Also, tenants leave at times creating vacancy loss. That decreases the profitability and is termed as credit loss.
  • Investment in real estate always invite high risk. We found that during the Covid period, the real estate faced great depreciation in value and loss in tenancy occupation.
  • Not all income from REITs are exempted from tax
  • Limited numbers of REITs operating in India do not leave much option for diversification for an investor
  • Growth prospect is not very high
  • As the REITs are listed in exchange there is market related risk involved
Pros and Cons of REIT investing
Pros and Cons of REIT investing in India

Conclusion

REITs are new and modern investment vehicles in India. These are still in a nascent stage and the companies are new. But this investment opportunity provide a steady and stable income growth in the long run. Before investing, an investor should prepare a checklist from the points already discussed and check the REITs thoroughly. Many investors find these investment propositions as attractive and expect strong growth in this sector.

We hope this primer was able to help you in not just understanding what is REIT investing in India but also helped in finding the best REIT stocks.

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