REITs: Empowering Investors with the Magic of Real Estate Alchemy

Enchanting Choice of Investors

Real estate is something everyone loves to have in their portfolio. There may be a piece of land in an area that you think will soon see skyrocketing prices. Or you may also be able to secure a decent chunk of rental income by buying a swanky commercial property in a prime business area.

However, there is a problem. There is a lot of work involved in making these investments. In order to ensure all property papers are in order, you need lawyers and due diligence. Investing and entering the market will require a big budget. It might eat away all your capital and cause a concentration risk.

But in year 2019, Real Estate Investment Trusts (REITs) comes into picture in India and gained popularity among investors .In recent years due to their unique structure and potential for high yields this become popular among Investors.  

REITs are a type of investment vehicle that owns and operates income-producing real estate assets, such as apartment buildings, commercial properties, and shopping centers. They are similar to mutual funds, but instead of owning stocks and bonds, they own physical properties.

Key ingredients that turns a company into Real Estate Investment Trust

Following Conditions should be met by the company to be qualified as REIT in India - 

1. 80% of the Investments must be made in properties that are capable of generating revenues.
2. Only 10% of total Investments must be made in properties under construction.
3. 90% of the Income must be distributed to the Investors in the form of dividends.
4. The company must have at least asset base of Rs.500 cr. 
5. NAVs must be updated at least twice every financial year.

How REIT's Generating Income and What Investors Get?

Infrastructure and Real estate are two most critical factors for a developing country. A well developed infrastructure is the key driver for the overall development of country. Real estate is closely related to infrastructure and is fundamental  to it's growth.

REITs are companies that owns and operates income-producing real estate assets, such as apartment buildings, commercial properties, and shopping centers etc.. 

There are three income sources for REIT -

• Rental Income from properties that are part of it's portfolio.
• REIT also earns dividend from Subsidiaries (called  Special Purpose Vehicle or SPV)it has invested in.
• Repayments and Interest on loans given to SPV. 

As a result, you'll be required to determine the exact source of your payout if you've invested in a REIT.

In most of the cases dividend received is tax free in your hand. But you need to add Interest and Rental Income in your total income.

So, If you pay 30% tax on your income you've to pay little from your REIT's investment income too.

And If we talk about Capital appreciation that is if you bought any REIT share from stock exchange for Rs.100 and sell it after 3 years later at Rs.150, you'll have to pay tax at 10% on those profit above Rs.1 Lakh in the Financial Year. Else, If you sell before 3 year span you'll be taxed at 15% on gain.

So. yes taxation part is also important while looking for an investment opportunity.

How REIT's can be evaluated?

Well, there are few things to keep in mind while evaluating REIT's. Let's discuss some of them here -

1. Weighted Average Lease Expiry(WALE) - Basically, this is the measure which give a compact view on how much time left for the property to go vacant. Vacancies are a major issue in commercial real estate. So WALE is higher the better.
2. Diversification - Diversification in portfolio ensures that the risk of cash flow is limited in case tenant(s) looks somewhere else. The portfolio must be diversified in types of properties (Commercial, Residential, Retail, Industrial) and their geographical locations. Assess the diversification and potential for income growth within the portfolio.
3. Occupancy Rate - It indicates whether malls are attracting enough renters to maintain occupancy rates. Higher occupancy rate generally indicates stable cash flows, while low rates may suggest potential risk or operational issues.
4. Net Operating Incomes - NOP is simply lease rentals after adjusting operational expenses.  Lease rentals can now be tied to fixed annual increases. And it's also linked with the sales of stores. If stores are doing well, these lease rentals also increase.
5. Dividend Yields and Distribution History -  This is something every Investor look up to. Examine the dividend yield, which indicates the annual dividend payout relative to the REIT's stock price. Assess the consistency and growth of dividends over time, along with the REIT's ability to generate sufficient cash flow to sustain dividend payments.

In addition to quantitative analysis, qualitative judgment, and industry research, the evaluation process may require a combination of techniques. REIT investment decisions should be made after conducting thorough due diligence and seeking advice from a financial professional.

We will continue this article in our next blog post. We'll conclude with a practical example and a bit more insight into the industry. In the meantime, keep learning and keep shining.

Voila!!

Thankyou for your patience!