How to invest in commercial real estate without actually buying it?
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
Listen to the Article (6 Minutes)
Summary
Explore the rise of REITs in India, making commercial real estate accessible.
Ever looked at a high-end business park, a plush hotel, or everyone’s favorite shopping malls and wished you could afford to own a part of it or add it to your investment portfolio? That wish can now be a reality and with minimum capital thanks to Real Estate Investment Trusts (REITs).
In India, having historically seen the homes we grew up in appreciate in value, we deeply understand the merit in owning real estate. We’ve seen rents outpace inflation, and barring a few hiccups, our own experience tells us that real estate is a solid, reliable, relatively safe investment in the long term.
However, for most of us, investing in real estate means buying residential real estate because it is easier to acquire: the ticket price is generally lower, the loans are less expensive, and now, with the advent of RERA, even buying properties that are under-construction isn’t the risk it once used to be.
Commercial real estate, on the other hand, while holding undeniable value, has often remained outside the reach of India’s common man. And the opportunity is huge. India’s Commercial Real Estate sector has played a pivotal role in the country’s growth story. It has led to significant development in office infrastructure, IT and Global Capability Centres (GCCs) hubs, and knowledge parks. This boom has provided employment opportunities and created investment avenues for many.
While that is too large an opportunity for India’s retail investors to pass up on, there were not many easy avenues for the average investor to reap the benefits.
Until now.
Introducing: Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) are an asset class that bridges the divide by bringing the opportunity to invest in high-end commercial real estate to retail investors. Simply put, in India, REITs are companies that own, operate, or finance income-generating real estate properties. As an investor, you get to invest in these trusts, and in so doing, into the commercial real estate holdings (workspaces, malls, and more) these trusts own. REITs allow individuals to invest in real estate without the challenges of traditional real estate investments, offering better liquidity and the opportunity to earn rental income through dividends.
Securities and Exchange Board of India (SEBI) approved REIT regulations in August 2014. Investing in REITs simplifies commercial real estate property ownership – there are no mountains of paperwork to handle, loans to apply for and permissions to seek. It also frees you from maintenance and upkeep as these properties are professionally managed. Most importantly, however, REITs create liquidity by being publicly tradable on stock exchanges.
The Benefits of Investing in REITS
REITs allow you to sidestep several barriers to entry and participate in the commercial real estate market without the complexities of direct ownership. When you invest in a REIT, you essentially own a share of its portfolio – all of the properties it owns today and will continue to acquire tomorrow. You aren’t investing in a particular office building or mall, but a wide selection of them.
This creates several advantages for the retail investor:
- Low Entry Point: Unlike the massive capital required for direct commercial real estate investment, REITs allow you to participate with a much smaller investment, often starting as low as ₹100 per unit.
- Liquidity: REITs are traded on the stock exchange, offering you the flexibility to buy and sell units easily. This allows you to adjust your investment holdings based on your financial needs.
- Steady Income Stream: REITs are required by law to invest 80% of the portfolio in income producing assets and distribute 90% of their income to investors in the form of dividends, at least every 6 months. This translates to a regular income stream that can complement your other investments and contribute to your financial goals.
- Invest in High-Quality Assets: REITs provide access to a diversified portfolio of premium commercial properties that would be otherwise inaccessible to individual investors due to the high cost. Imagine owning a share of a building that houses leading multinational companies from across the globe!
- Professional Management: Your investment is handled by experienced professionals who manage the entire portfolio, including property selection, tenant management, and maintenance.
- Diversification of Your Portfolio: REITs offer a valuable tool to diversify your investment portfolio beyond traditional assets like stocks and bonds. This diversification can potentially reduce overall portfolio risk and enhance its resilience to market fluctuations.
- Transparency and Security: REITs are SEBI-regulated investment vehicles, ensuring transparency and adherence to strict financial guidelines.
- Growth Potential: As an investor, you’re invested in the REITs real estate holdings today, and the ones they acquire/develop tomorrow. This means that you benefit from the growth that comes from appreciation on existing holdings, as well as new acquisitions. The same also applies to your earnings too.
How to Invest in REITs
Investing in REITs is identical to buying any other publicly traded asset. Any investor, be it domestic or foreign, retail or institutional, has access to REITs through their demat account. Once you purchase it via your demat account, it will begin paying you your distributions in your account every quarter, till such time you choose to sell it. Selling a REIT is just as easy as buying it – login to your demat account, and sell it just like you would any other asset.
Moreover, as mentioned earlier, REITs have a really low entry point – you can buy one for as low as ₹100 per unit. There is no minimum trading lot size!
REITS: A Global Model, Tailored for India
While REITs have existed for decades globally, the REIT market in India is still in its nascent stages. The Indian REITs Association (IRA), formed under the guidance of SEBI and the Ministry of Finance, is dedicated to advancing the growth and development of the Indian REIT sector. Comprised of prominent founding members like Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT, and Nexus Select Trust, the IRA boasts a collective expertise that will be instrumental in shaping India’s REIT market.
Since the listing of the first REIT in 2019, the Indian REIT market has witnessed tremendous growth with the total Assets Under Management (AUM) at a staggering ₹1,30,000 crore. This phenomenal growth is further underscored by the vast portfolio of these REITs, encompassing over 115 million square feet of Grade A office and retail spaces across the nation.
This is only the beginning, thanks to robust investor appetite for this asset class. In just five years, REITs have distributed more than ₹15,500 crore, and have raised over ₹25,500 crore of equity capital through primary issuances, including initial listings and follow-on offerings. Notably, the number of unitholders has crossed the 200,000 mark which points to growing enthusiasm among retail investors.
By incorporating REITs into your investment strategy, you gain exposure to a high-quality asset class, benefit from professional management, and enjoy a potentially steady stream of income, in addition to capital appreciation pegged to multiple growth levers a REIT offers.
It’s time to leverage the power and potential of the best of India’s commercial real estate to fuel your portfolio’s growth.
Note: This is a partnered post.
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