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4/12/2019

India’s First REIT: All You Need to Know

The initial public offering (IPO) of Embassy Office Parks REIT, the first ever by a Real Estate Investment Trust in India (REIT), was launched on March 18, 2019, and closed on 20 March 2019in the price band of Rs 299-300. 

The three-day IPO that ended on March 20 saw robust demand and the Embassy REIT IPO was subscribed 2.58 times on the final day of bidding.

At a price band of Rs. 299 to Rs. 300, Embassy REIT issued units aggregating up to Rs. 4,750 crore. The initiative taken by Embassy Group backed by Blackstone, the world largest alternative asset manager, is good for the Indian real estate sector that has been experiencing a severe liquidity crisis.

The introduction of Real estate investment trusts is intended to enable all kinds of investors to invest in the Indian real estate market and boost funding in this sector. What is REIT and How does it work? Clicbrics lists below the nitty-gritty of Real Estate Investment Trust (REIT)- 

What is it?

REITs are securities linked to revenue-generating properties that can be traded on stock exchanges once they get listed. These properties in India will include commercial assets like primarily office spaces - that can generate steady rental income. A REIT works very much like a mutual fund or shares. Just like mutual funds, in REITs, there are sponsors, trustees, fund managers, and unitholders. Real Estate Investment Trusts basically facilitate investments into the real estate industry where the investors are buying units rather properties and profiting from their investment for the same. This is good for those people who are not looking to buy properties but only looking to invest in the real estate market.

What you should know:

  • As per REIT guidelines, it is mandatory for 80 percent of the company’s assets to be invested in completed and rent-generating properties.
  • The remaining 20 percent include under-construction projects, equity shares of the listed properties, money market instruments, cash equivalents, and real estate activities.
  • To ensure regular income to investors, it is obligatory to give at least 90 percent of the net distributable cash to the investors at least twice a year.

How does a REIT work?

It is a process to generate funds from investors, to directly invest in a variety of properties, including offices, retail centers, apartment complexes, hotels, warehouses, data centers, etc. All REITs that get listed with the stock exchanges, and they would function like structured trusts. Investors can invest in REITs in the primary and secondary market and exit any time they want. But they all have to invest at least ₹2.4lakh in. Also, the minimum issue size of a REIT is 250 crore.

Expected Return on Investment (ROI)

Expected ROI would be in the range of 7-8 percent annually, post adjustment of the fund management fee. From REITs, an investor can earn two types of income; through capital gains from REIT units sales and a dividend income.

Structure of REITs

REITs can be set up as trusts under the provisions of the Indian Trusts Act, 1882 and are registered with Securities and Exchange Board of India (SEBI). Similar to a mutual fund, it has three parties:

  1. Trustee: The trustee generally has an overseeing role on the activities of the REITs and is supposed to be a SEBI registered debenture trustee who is not associated with the sponsor;
  2. Sponsor: The sponsors hold at least 25% in the REITs for at least 3 years and 15% after that. The main responsibility of a sponsor is to set up the REIT and appointment of the trustee; and
  3. Manager: A manager would be a company or an LLP or a body corporate incorporated in India which manages and operates the REIT. A manager needs to have at least 5 years’ experience along with other requirements as notified.

Types of REITs in India

1.   Equity REITs: They are owners of the real estate properties like shopping malls, large office spaces, massive residential townships and then lease it to companies or individuals to make money. The income is then divided among the REITs investors in the form of a dividend.

2.   Mortgage REITs: They are not the owners but get EMIs against the property from the owners and builders. The earnings are via Net Interest Margin which is then distributed among the REITs investors as dividends.

Why is it important?

The Indian real estate sector has been facing a liquidity crunch and it seems to be crippling the sector across the country. The introduction of REITs in India can help cash-strapped builder who is struggling to reduce debt to monetize their existing property. Also, it gives investors a platform to buy into India’s property market which otherwise may be out of their reach due to a large amount of money to be spent for acquiring such properties. Thus, from the perspective of Indian investors, holding units of REITs is an alternative route for investing directly in real estate.

It would also enable the diversified portfolio of the investors and provide the investors with a new product that is regular income generating. According to an estimate, the assets that may qualify to be included in REITs may reach $20 billion by 2020. In the first three to five years, around $12 billion could be raised.

It will also bring much-needed transparency at least in the commercial sector, and lower the dependency on financing from banks and will encourage developers to own and manage assets with a long-term view.

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