Real Estate Investment Trusts
Updated: Aug 11
We have seen the big commercial buildings where multinational companies have their plush offices. The possibility of buying those commercial buildings is a far-fetched dream for most of the retail investors but now with REITs (Real Estate Investment Trusts) , this is a possibility. REITs is a way of investing in real estate, particularly commercial real estate without ACTUALLY buying the property. Sounds good? Isn’t it?
In simple terms, a REIT is a company/trust which owns income producing real estate. It issues units in demat form that are allotted to investors by pooling in their money. In this way, an investor becomes an owner of a part of the trust/company. The buying and selling of these units takes place once the company/trust gets listed on the exchange. This makes it a liquid investment unlike the actual real estate market. There are various types of REITs such as Equity REITs, Mortgage REITs, Hybrid REITs etc, the most popular being Equity REITs. The investors who invest in REITs receive a steady income of dividend. REITs lease office spaces to the companies binding them in a contract, generally of 3-5 years from which they earn rental income.
The REITs have to distribute 90% of this rental income (minus expenses) in the form of dividend and the rest 10% is retained with them. REITs are very popular worldwide with countries like Singapore, U.S, Malaysia where their market capitalisation is 55%, 96% and 51% respectively. The first ever REIT was established in the U.S in 1960. It is still in its primitive stages in India. There are only 2 REITs in India currently. The first ever being, Embassy Office Parks REIT established in 2019. Another one is, Mindspace Business Parks REIT which recently came up with its IPO.
The public issue has been subscribed 12.96 times, receiving bids for 87,78,24,600 units against an offer size of 6,77,46,400 units. It consists of fresh issue of Rs 1,000 crore and offer for sale of Rs 3,500 crore. It had to reduce the offer size to Rs 1,856.26 crore as the K Raheja Corp and Blackstone Group-backed company has already garnered Rs 2,643.74 crore from strategic and anchor investors! The issue was oversubscribed despite the pandemic where investors are facing liquidity crunch. This definitely shows a strong investor confidence. But why?
Let us find out:
Mindspace Business Parks REIT has tenants which are majorly multinational corporations and fortune 500 companies like Amazon, JP Morgan, Accenture, Barclays among others.
It has adopted the old tax regime, so the investors do not have to pay dividend tax.
The investors will get a steady flow of dividend income as it is mandatory for REITs to distribute 90% of its net income in the form of dividends to its unit holders.
It has 2.8 million square feet of under-construction area and 3.6 million square feet of future development area out of 29.5 million square feet. These areas can potentially generate significant revenues if and when they are converted into leasable areas when developed.
Minimum investment limit is Rs 55,000. As per revised SEBI rules, the minimum investment must be around Rs 50,000 as opposed to Rs 2 lakhs earlier with the aim to make it accessible to the common retail investors.
It has office portfolio in cities like Mumbai, Pune, Chennai, Hyderabad which is the crème de la crème because these are the major IT and financial service hubs in India.
It has 170+ tenants with each one contributing to an equal share of 7.7% of rental income. This means that the risk is equally distributed. The work from home policies implemented by the companies have reduced the demand for office spaces due to the Covid-19 pandemic but if the company (tenant) is in a contract, it has to pay the rent for the office space. So, the rental income will not be affected much if that is the case.
Moreover, the issue saw a far better response than its industry peer Embassy Office Parks REIT's Rs 4,750-crore IPO, which was subscribed 2.57 times in March 2019 mostly because of the above listed reasons.
The IPO success of Mindspace Business Parks REIT also shows that there is a demand for these kind of investment instruments because considering the Covid-19 pandemic, investors are looking for steady income generating investments.
Now let us consider the What-if scenarios for Mindspace Business Parks REIT:
It might become a problem of revenue depletion for the company if increasing number of its tenants(companies) don’t renew their contracts in the long term.
Also, if the company changes its taxation policy, i.e. if it follows the new tax regime, the dividend income in the hands of investors will become taxable. This will make investing in this company less attractive for investors.
All in all, REITs are a convenient way of investing in commercial real estate if one wants some diversification in their respective portfolio. An important point to note here is that REITs are a fixed income generating investment instruments with capital appreciation in the long term. The pandemic has added fuel to the fire to the already hit real estate sector, which is suffering with liquidity. REITs have the potential to boost the real estate market in India in the long term and instill investor confidence.