As the country prepares for the launch of its second REIT (Mindspace Business Parks) in a few days, there will be many questions that investors seek answers to; who should invest or what is the minimum investment required or even whether it would be a good option for millennials who have a no-strings-attached approach and are relatively wary of investing in real estate.
The answer to the last question is yes. The first REIT launched by Embassy Group last year could be bought for a minimum investment of around Rs 2.4 lakh for 800 units as per Sebi norms. It is Rs 55,000 for 200 units for the Mindspace Business Parks REIT which will open for subscription on July 27.
Sebi has brought down the minimum investment into REIT from 800 units to 200 units, in a move to encourage more retail participation.
The price band of this REIT has been fixed at Rs 274-275 per share. The company is looking to raise up to Rs 4,500 crore from this issue, which consists of a fresh issue of units aggregating up to Rs 1,000 crore and offer for sale of units of Rs 3,500 crore.
Since the IPO and listing in 2019, Embassy Office Parks REIT has shown an appreciation of 8 percent (As on July 9, 2020), reaching a maximum appreciation of around 50 percent in the pre-COVID phase.
Millennials' attitude towards real estate purchase
Millennials are not as particular about the status value of their address as they are about the connectivity, conveniences and security of a neighbourhood. They want to be able to get to work and back home quickly and enjoy a decent level of social amenities in the area they live in.
For many of them, buying a home in such an area may be beyond their financial capability, so renting makes complete sense to them. However, even if it is affordable, Millennials as a global breed do not necessarily view buying a home as the best of investment choices and may choose to put their surplus cash into stocks instead said an analysis by Anarock.
Also Read: Mindspace REIT IPO affirms appetite for Indian commercial real estate among global investors
Globally, especially in the highly-developed countries, the Millennial Mindset as a factor influencing residential market trends highlights a definite predilection for renting as opposed to buying homes. We are also seeing this trend in India, but it is far less distinct, the analysis said.
Post-Covid, this rent generation seems to be rethinking its strategy with nearly 40 percent saying they would want to invest in property that is rightly priced, an analysis by housing.com said.
Will millennials invest in REITs?
Real Estate Investment Trust (REIT) is a publicly-traded company that owns, operates or finances income-generating real estate assets. They provide investors' a chance to own valuable real estate and get access to dividend-based income. They are among the few options for small investors to have a source of income from rentals generated by their portfolio.
They are akin to mutual funds with underlying assets like commercial office spaces, retail malls, data centres, industrial parks, warehouses, hotels, residential apartments depending on the legislative allowance.
Just as there is interest among HNIs, business houses, CXOs, Family Offices to deploy money in this upcoming REIT, with the awareness created by the social media, there is interest among millennials to invest in REITs as well.
“In this issue, they could invest as little as Rs 55,000 compared to Rs 2.4 lakh in the Embassy REIT launched last year. Millennials can come forward as the minimum ticket size is less and participate in this opportunity,” said Vishal Ahuja, Head – Private Wealth Group, JLL India, adding that the investors could look at the first year pre-tax returns at 7.1% with a potential of an upside.
Arvind Nandan, Managing Director, Research & Consulting, Savills India is of the opinion that while a millennial cannot buy a REIT for Rs 5,000 to Rs 10,000 as they would pick up other investments like stocks in the market, an investment in REIT is still a small amount compared to buying real estate which is not less than Rs 50 lakh.
“Millennials could look at investing in REITs if they have Rs 5-10 lakh of investible surplus with them. If you have that surplus, you can expect returns as high as 7 percent. The entry point for a REIT is still high compared to other investments. You need a sizeable number of units for good return volumes,” he explains.
Pre-tax yields of REITs have proved to be better than the most widely-used investment options in the country. Interestingly, the yield gap widens when we take tax into consideration. The dividend portion of the income from REIT being non-taxable lends a significant advantage to a retail-investor, he said.
Post-tax returns of REITs could be almost twice or more than fixed deposits, recurring deposits, government bonds and other classes. Although PPFs provide higher returns and are non-taxable as well, the lock-in period involved in the relatively illiquid instrument, is a deterrent for investors - especially those in the younger age bracket, explains Nandan.
REITs, on the contrary, much like pure equity products allow the ease of entry and exit to the retail investor at any point of time and that could interest the millennials, he says.
"REITs are an interesting and important part of asset allocation. One should put REITs ahead of gold in the sense of stability and regular income. On a regular basis, one should strive to have 5 percent of the total portfolio value in REITs. The expected yield for REITs is anywhere between 7 percent to 7.5 percent," said an analyst.
Things to remember
Also, for companies, especially in the outsourcing segment, the office still remains the cheapest and most effective way to deliver all the requisite infrastructure for the employees. A consequential de-densification of office spaces will mean the return of the golden rule (100 sq.ft. per person norm) of the early 2000s, Nandan said.
Besides the focus on IT companies, data centres, warehouses could emerge as the asset classes that generate increased interest among developers with respect to REITs in India. In the long term, and as markets mature, student housing and senior living also have an upside potential only, he said.
As for the pandemic and its impact on the commercial real estate market, it needs to be borne in mind that the current crisis has its roots in sociological and biological problems, unlike during the global financial crisis.
“The biological nature of the problem has weakened the physical aspect of real estate occupancies but once a solution emerges from the scientific domain will be key to reinstating the confidence in this asset class,” Nandan said.