Reality of REITs

Real estate as an asset class has always attracted investors, but the high-ticket size has made it out of reach for many.

Claim: Today, in India, you can invest in commercial real estate by shelling out as low as Rs 55,000. Sounds dubious? Well, SEBI has made sure that the claim isn’t dubious.

But how do you invest in commercial real estate with an amount as low as Rs 55,000?

The answer is a Real Estate Investment Trust (REIT).

The recent Mindspace IPO was a blockbuster and showed tremendous confidence of investors in the REIT/Commercial real estate sector of India. The minimum lot size being offered was 200 units for Rs 55,000 (275 Rs per share).

But what is a REIT?

Real estate investment trusts (REITs) issue shares that trade publicly like shares of stocks. REITs are often identified by the type of real estate assets they hold: mortgages, hotel properties, malls, office buildings, or other commercial property. The rental income from these assets is distributed to the shareholders as dividends.

The REIT market in India is underdeveloped as compared to the US, or other Asian counterparts. As of 2019, the share of REITs in the overall Real estate market cap stands at 96% for the US, 55% for Singapore, and 51% for Japan. With the Mindspace issue, the share of the REIT market cap might go up to 29% from 17% (As of 2019).

Win-Win for REIT, REIT investors, and commercial developers

To get listed, it is mandatory for the REIT to have the minimum underlying asset valuation at Rs 1,000 crores. Once listed, funds are collected from retail and other institutional investors during its IPO. The initial corpus coupled with the funds from the IPO is pooled together to primarily invest in completed, income-generating commercial real estate properties.

A REIT can make money for its shareholders in two ways:

1. Dividends: As per the SEBI guidelines, at least 90% of the profit after tax must be distributed to shareholders in the form of dividends, paid twice a year.

2. Capital appreciation: As REIT stocks are listed on BSE and NSE, price appreciation of its shares because of the performance of the underlying assets also earn returns for the investors.

But what is in it for the commercial real estate builders?

They get to monetize the portfolio of their operational assets, unlock capital, and deleverage their balance sheets/expand.

For example, consider the case of a builder X. X owns an office park that generates a monthly income of Rs 8 lakhs. X has also borrowed from a bank to start the construction of another project Y. However, construction has come to a complete standstill because of COVID-19 and heavier than normal monsoons. The interest and the principal payments for project Y to the bank need to be made on a timely basis, and X could use some extra cash to make these payments.