REITs: An option to invest in commercial realty, now in India
India’s first Real Estate Investment Trust (REIT), Embassy Office Parks REIT, will open its initial public offering (IPO) on Monday and will close on March 20. At a price band of ₹299 to ₹300, Embassy REIT will issue units aggregating up to ₹4,750 crore.
To invest, you need to bid for a minimum of 800 units and in multiples of 400 units. The units of the Embassy REIT are proposed to be listed on the National Stock Exchange of India Ltd and BSE Ltd. Of the total units, 25% of the issue will be available for non-institutional investors. Axis Trustee Services Ltd is the trustee to the issue, while Embassy Office Parks Management Services Pvt Ltd is the manager to the issue. Considering that you now have one more option to invest, let’s understand how the product works and if should you invest in it.
What is it?
REITs allow you to invest in real estate in small amounts through paper format or in the form of securities. REITs usually invest in commercial properties that would otherwise require a large amount for investment. It uses rental income to pay dividends to investors. But will retail investors be interested in investing in commercial real estate through this route? “I think it is tough to tell. We have gone and spoken to non-institutional investors. The initial trading lot is ₹2.4 lakh and then ₹1.2 lakh,” said Sachin Shah, chief investment officer of Embassy Office Parks. But how does it work against owning a physical commercial property? “In direct real estate investment, you are wedded to one property, there is no diversification and it is an illiquid investment. In REITs, you sell units on exchange and it is more liquid than physical investment,” said Shah. In case of Embassy Office Parks REIT, the yield works out to 8.25-8.28%.
From a taxation point of view, if you hold on to the units for more than three years, long-term capital gains will be applicable. If you sell it before three years, then short-term capital gains will be applicable on appreciation. “On regular income in the form of dividend, you don’t have to pay tax. If the money is in the form of interest, you will be taxed on your slab rate,” he added. Before investing, you need to look at the quality of the underlying asset. “The parameters you need to evaluate include the quality of the underlying assets, current yield of the assets, location of the assets, track record of asset managers, occupancy rate and quality of tenants. If the underlying assets are not maintained properly, then the value of the property can depreciate. The supply-demand situation also needs to be looked at. If the location has a large supply pipeline, then it may lead to decrease in rentals and occupancy rates. The tenants’ agreements should be looked at to ensure there is sufficient lock-in and rental escalation,” said Gaurav Awasthi, senior partner, IIFL Wealth Management Ltd.
What you should know
Firstly, it is not an equity fund. “It is a unit of REITs of an asset class to which people have not been able to get exposure. It is a minimum three-year holding story. With the kind of compression on interest rate coming off and quality of tenants, you can target an internal rate of return (IRR) of 15% in a product like this, on the 3-5 year period. Today if you buy commercial real estate anywhere, yields are less than 8%. You are getting commercial asset with Blackstone as the owner at 8.26%. Our expectation is you will see growth during the 3-5 year period on the capital side. Your underlying unit will see capital gain and that is going to be treated as equity capital gain when you exit,” said Prateek Pant, co-founder and head - products and solutions, Sanctum Wealth Management.
“It is more favourable for overseas institutions because for them, the withholding tax is much lower than interest income. Having said that, there seems to be an appetite for this product from high net worth individuals right now,” said Pant. Post tax, you will make anywhere between 8-10%, he said. Based on the response of the current REIT, it is possible that a couple more issues may hit the market this calendar year.