REITs offer an effective investment strategy for investors looking to earn dividends from commercial property investments without directly owning or financing any commercial property.

REITs or Real Estate Investment Trusts are fast making their way into the Indian real estate sector. They have become a preferred tool for retail investors to earn dividend from commercial property investments without directly owing or financing any commercial property.

Regulated by SEBI and working on the pattern of mutual funds, REITs are investment vehicles that pool together the capital of multiple investors to own, operate or finance income producing commercial real estate.

They manage these properties or assets to generate regular income and for capital appreciation. In order to ensure income generation, SEBI requires that REITs invest 80 percent of the portfolio in completed and income generating properties and only 10 percent in under construction properties. SEBI also requires that 90 percent of the income be distributed as dividend among the investors.

Technically REITs invest in all types of income-generating properties e.g. residential property, office property, malls, warehouses, hotels etc., however the listed REITs in India are primarily focused on office space.

Let’s take a look at the recent development concerning REITs in India.

Listed REITs in India

Since the launch of the first REIT two years ago, India currently has three listed REITs. These are Embassy REIT, Brookfield REIT and Mindspace REIT. All these three REITs are listed and traded on both the BSE and the NSE and together have a portfolio of 87 million sq.ft.

Embassy REIT, co-sponsored by the Blackstone Group and Embassy Group, is India’s first REIT listed in April 2019. This REIT owns and operates 42.4 million sq. ft. of portfolio consisting of infrastructure, office parks, and buildings.

The Brookfield REIT is sponsored by an affiliate of Brookfield Asset Management which is one of the world’s largest alternative asset managers. The company’s portfolio of 4 million sq. ft. consists of campus format office parks.

On the other hand, Mindspace Business Parks REIT is sponsored by the leading property developer K Raheja Corp and global private equity fund manager Blackstone. Its portfolio includes a total leasable area of 30.2 msf consisting of office spaces in major real estate markets such as Mumbai, Pune, Hyderabad, and Chennai.

Performance of REITs

REIT as an asset class has performed better than BSE Sensex, the Realty Index and most of the small, mid and large-cap mutual funds. Embassy Office Parks REIT garnered a 12% increase in its net operating income (NOI) of Rs. 2,032 in FY 2020-21 on YoY basis. Its revenue grew by 10% to Rs. 2360 crore for the same period.

On the other hand Brookfield India REIT registered an increase of approximately 4% in its NOI to around Rs 170 crore for Q2 2021 on a Y-o-Y basis. Its unit holders received dividend of Rs 181.7 crore.

Mindspace business parks REIT achieved an NOI of Rs. 358 crore during H1 2021 on a Y-o-Y basis.

Overall, while the Brookfield India REIT recovered exceptionally during the last six months, the Embassy Office Parks REIT and the Mindspace Business Parks REIT never traded below their issue price despite the COVID-19 pandemic,

REITs Vs. InvITs

Infrastructure Investment Trusts or InvITs are structurally similar to REITs but the difference lies in the fact that while REITs own and operate office space, InvITs operate infrastructure. Infrastructure in this case includes but is not limited to roads, bridges, dams, power grids etc.

There are two publicly-listed InvITs operating in India i.e. India Grid Trust and IRB InvIT. Similar to REITs, performance of InvITs has also remained good. While India Grid Trust fetched a return of 56% for its unit holders during FY 2020-21, IRB InvIT performed even better at 83% for the same period.

Recent Market Development

SEBI has been making quite a few tweaks to REIT regulation since its launch to encourage better investor participation. Recently with an objective to improve liquidity in REITs and attract more listings, SEBI brought down the minimum investment amount in a REIT to Rs. 10,000-15,000 with the revised trading lot at one unit. Earlier, the investment amount was ₹50,000, and the trading lot 200 units in the secondary market. This is a welcome step by the market regulator.

Future Outlook

India has approximately 650 million sq. ft. of Grade A office space, of which 310-320 million sq. ft. is REIT-able stock. The current 3 listed REITs manage a portfolio of 87 million sq. ft. Therefore there is ample potential for more space being added to the existing REITs or the listing of new REITs.

On the other hand, despite pandemic, REITs have delivered promising performance and are on growth path. Recent performances of REITs have shown that they have the potential to deliver value for all the stakeholders including investors, sponsors, trustees etc. Therefore, this relatively new asset class presents tremendous opportunity to investors. However despite being innovative REITs may not be suitable for everyone. One must evaluate the risk and return before investing.