Although Real Estate Investment Trusts (REITs) are considered a relatively new investment vehicle in India, the structure has been an integral part of the personal portfolios of many investors around the world for many years.
Historically, REIT portfolios have been one of the best performing asset classes available and should be an essential component of any diversified long-term investment portfolio. REITs, a $ 2 billion asset class, have enjoyed tremendous success globally, providing institutional and retail investors the opportunity to benefit from real estate growth across multiple industries and geographies. In the United States alone, 145 million people have invested in REITs through their retirement savings and other investment funds; Equity REITs outperformed the S&P 500 over the 20, 25 and 30 year periods.
SOLID LONG-TERM FUNDAMENTALS OF THE INDIAN OFFICE MARKET
The structure of REIT has permanently transformed the Indian office market since the listing of India’s first REIT, Embassy REIT, in April 2019, and subsequent listings of Mindspace Office Parks and, more recently, Brookfield Office Parks REIT.
The long-term fundamentals of the Indian office market are strong. Global companies are looking for flexible, productive and dynamic workspaces that provide a full business ecosystem for young tech talent available in India and in short supply around the world. Nasscom Industries in India employs over 4.5 million people, housed in high quality offices in major Indian metros. These companies are growing every year and have record hiring plans and order books from last year’s pandemic as the business world embraces digital transformation.
These occupants are not only of older style ITES companies, but are increasingly dominated by global captive centers and captive R&D centers of international companies. Today, there are over 1,500 such captive centers worldwide, and the expectations of industry leaders predict continued growth over the next 3-5 years.
These technology industries have been the driving force behind the growth of the commercial real estate sector in India over the past decade. The fact that India has listed three REITs with a combined market cap of $ 7.6 billion or INR 55,267 crore over the past two years shows how keen investors have been to embrace the history of the The evolution and growth of the office market in India, away from a fragmented, small scale and variable quality market to a more institutionalized and better quality conforming market that offers a better product to occupants and investors.
ACCESSIBILITY TO RETAIL INVESTORS
Commercial real estate has remained inaccessible primarily to retail investors due to high ticket prices, illiquid long-term investments, and difficulties in the administration and management of large assets. Now retail investors can build wealth through commercial real estate, through the REIT product, in a liquid, tradable unit with tax efficiency and high quality management.
REITs invest primarily in completed buildings, generating income from real estate assets. These typically produce the highest returns over a 7-10 year exit timeframe, making them a long-term investment just like private equity or mutual funds. Investments in REITs are negotiable market instruments and therefore transactions are much less burdensome than investing directly in real estate. The REIT’s assets are secured by long-term leases with multinational companies and Fortune 500, ensuring strict lease terms with occupants and a stable and predictable income stream.
DIVERSIFICATION AND TOTAL RETURN
In addition to offering retail investors the opportunity to invest in Class A commercial real estate by offering stable returns in the form of quarterly distributions, REITs also offer the potential for long-term capital appreciation to retail investors. Since REITs are required to distribute at least 90% of profits to investors, they are a great choice for those who need income or want to reinvest their dividends and let their earnings accumulate over time. REITs offer greater diversification, potentially higher total returns and lower overall risk. The assets of the REIT are professionally managed with a mandatory minimum allocation of 80% to completed and income generating assets, and the payment of regular income to unitholders, making REITs an attractive option for the Indian investor.
Another advantage is that REITs are particularly tax advantageous for the private investor; rental income received by the REIT, which in turn is distributed to unitholders, is treated as a transfer stream and is not subject to income tax.
THE BEST GOVERNANCE AND TRANSPARENCY
Global and domestic investors increasingly accept that the REIT structure in India has the best standards of governance and compliance. The way SEBI has structured REITs in India has made the asset a reliable investment for investors by maximizing safety and focusing on investor returns. SEBI has put in place effective governance, rigorous reporting, a regulatory framework and disclosure practices ensuring greater transparency.
SEBI has put in place effective governance and guarantees such as disclosure requirements, professionally managed real estate assets, a mandatory minimum investment of 80% in income-generating assets and mandatory payout income to unitholders, making REITs a safe and attractive option for the Indian investor.
REITs offer diversification, transparency, stable cash flow through distributions and capital appreciation, having the ability to build wealth with minimum downside risk over a long term horizon. Not only did the REITs continue to operate under normal circumstances, but they also demonstrated resilience during the pandemic in India. For example, Embassy REIT has generated a 24% total return since listing and has paid out over INR 3,700 crore in distributions to its unitholders in the eight quarters since April 2019.
REITs have the ability to withstand periods of high inflation and equity volatility, high interest rates and low bond yields; and have gone through multiple levers – contract escalation, market assessment, campus development and acquisitions. With this track record, a desktop REIT focused on the Indian market should be a central part of any asset allocation strategy alongside stocks and bonds for all retail investors.
INVESTING IN COMMERCIAL REAL ESTATE THROUGH NEGOTIABLE LIQUID UNITS:
Worldwide, REITs are a preferred mode of investment for retail investors as they offer security combined with high return and growth through indirect and regulated ownership of Class A real estate assets. The real estate industry has always been well regarded by Indian investors. However, traditional forms of investing in this sector had three important shortcomings: a high amount of initial investment, low liquidity and challenges of managing long-term assets. This meant that many investors could not invest in Grade
A commercial asset
REITs now allow Indian investors to reap the benefits of the commercial real estate sector, which until then were inaccessible to much of Indian society. Like stocks, investors can buy and sell units of REITs in the market, allowing for high volume transactions and the creation of cash on hand instead of direct investments that are opaque in terms of fees, low in terms of value. governance and illiquids.
DIVERSIFICATION and TOTAL RETURN
REITs offer greater diversification, potentially higher total returns and lower overall risk. The ability to generate dividend income along with capital appreciation makes a REIT an excellent instrument to offset volatility in equities and fixed income securities. There is also evidence showing that REITs have outperformed listed real estate stocks due to a consistent dividend distribution, making them an attractive investment around the world. With this track record, an office REIT focused on catering to the Indian market should be a central part of any asset allocation strategy alongside stocks and bonds for all retail investors.
The author, Michael Holland, is CEO of Embassy REIT. Opinions expressed are personal