REITs (real estate investment trusts) are quite popular among investors in the developed markets. Indian investors, on the other hand, have been introduced only recently to the concept of REITs. So, the market here is still nascent.
But there have been two recent developments in favour of REITs.
First was the move to reduce the trading lot size to one from 200 or more earlier. This has suddenly made REITs more affordable for smaller investors. This move will not only increase the trading volumes and liquidity, but also lead to better price discovery for REITs in the long run.
The other more recent SEBI move was to make REITs eligible for inclusion in indices. Earlier, REITs were not allowed to be part of indices. This move is expected to increase the visibility for REITs and lead to wider investor participation directly or via index funds/ETF flows.
Talking of REITs, it’s a fact that real estate in India has been a highly preferred asset for most. Not just as an investment, but as an emotional asset as well. And unlike physical real estate transactions that require large investments (funded via property and home loans), with REITs, you can take exposure to a diversified portfolio of different income-generating commercial properties with just small amounts. To be honest, most Indians cannot afford good, commercial properties on their own. It’s out of their budget. But via REITs, it’s possible to get fractional ownership of a portfolio of such commercial properties.
But isn’t real estate risky?
It depends on your view. Some think of real estate as pretty safe. Others don’t.
But REITs are well-regulated instruments. These compulsorily invest 80 percent or more in completed, income-generating projects. Further, a minimum of 90 percent of the rental income generated by a REIT is to be distributed to its unit-holders. That is not to say that these are risk-free. The incomes for REITs are dependent on rentals and in times of economic slowdown, this can take a hit. The oversupply of commercial real estate can also impact the rents for REIT assets. Then, there is this pandemic-triggered risk of hybrid WFH+Office model being the norm in future. This, too, can have an impact on rental yields.
So should you invest in REITs?
First, you need to understand the structural return profile for this product.
The product is a sort of hybrid vehicle with characteristics of both equity as well as debt. How?
It is like a debt product because of having to mandatorily distribute 90 percent of its net distributable income. And it is like equity because it is listed/tradeable on the exchanges and its price depends on demand-supply, market’s perception, etc.
So, it’s a play on both regular income and capital appreciation. But more of the former and less of the latter.
Therefore, your return expectations should be similar to what you get from debt products. There is a possibility of having this income-generating debt instrument additionally generating some capital gains in the long run. Also, your returns from REITs can increase with future rental increases, increasing occupancy of vacant parts, the addition of new properties to the portfolio (as a percent of portfolio is allowed in under-construction projects).
Now let’s ask again.
You should look at it REITs from the lens of regular income generation and potential for moderate capital appreciation in the long term. So don’t use them as a proxy for equity, but as an asset that can deliver returns better than debt instruments over the long term. REITs allow you to bring in a new alternative asset into your investment portfolio.
So, if you are someone who has the required risk appetite and is looking to add commercial real estate into your long-term investment portfolio, then you can consider REITs in small doses, for now. Also, over a period of time and as more REITs/InvITs become available, it’s better to diversify among 2-3 such products.
The market is still maturing in India. Once it does, it might be possible to look at having about 10-15 percent of one’s debt portfolio invested in REITs.
Note: In my view, senior citizens looking for regular income should not depend on quasi-debt-quasi-equity products like REITs. For them, it’s best to stick with proven fixed income products. If they have to get into REITs, it should be more like a portfolio diversifier and not as a core portfolio component.
Talk to your investment advisor about whether it makes sense for you to get into REITs or not.