REITs vs Real estate | Real Estate Investment Trust - REIT investing in India explained - YouTube

Hi, I am Gunjan Grover.

Today we will be covering an investment class that is very popular in advanced economies but is still in the initial stages in India.

This is an asset class that provides all the benefits of owning real estate without actually owning actual real estate.

Yes, we will be talking about REITs.

In this video, we will be discussing- What are REITs? How do REITs work?

What are the different types of REITs? What is the difference between REIT and a real estate company?

What are the pros & cons of investing in REITs? What are the Top 3 REITs in India currently?

First, let's talk about REITs.

The full form of REIT is Real Estate Investment Trust.

REITs are companies that own, operate, and sometimes finance income-generating real estate.

REITs can own any kind of property including Commercial real estate like office buildings, commercial parks, malls, hospitals, and hotels.

Residential real estate like apartments, single homes, and student housing.

REITs were first formed in the USA in 1960 to create an asset that would provide an everyday investor with the opportunity to invest in large-scale,

Diversified portfolios of income-producing real estate in the same way they invest in other asset classes- tradeable and liquid securities.

Thus, REITs are structured like mutual funds where just like mutual fund investors,

REIT investors have a claim to the gains made by the investment done by the REIT without outright owning big chunks of properties themselves.

REITs also allow for exchange trading of its units similar to shares or ETFs

Thus providing liquidity and ease of usage along with the benefits of real estate exposure.

Now let's know, how does REITs work.

REITs are mostly formed by real estate companies who act as the sponsor for the REIT when it is formed.

The sponsor is like the majority shareholder or promoter of the newly formed company or trust.

The sponsor appoints a trustee responsible for holding the trust's real estate assets so that he doesn't have any direct control over assets.

Now the Trustee appoints a Manager who is responsible for managing the assets and making the investment decisions for the trust.

Now the REIT can be floated in the market to attract retail shareholders who act as unitholders of the trust.

REITs earn mostly through rental income from working properties and capital appreciation on the sale of assets.

There are many regulations that SEBI has put in place for REITs in India.

The most important ones. REITs have to distribute 90% of their distributable cash flows in the form of dividends or interest.

At least 80% of the REIT’s assets must be finished or income-generating properties.

Now let's talk about different types of REITs.

There are many different types of REITs depending on the type of real estate that they are investing in.

The most prominent ones are as follows.

Office REITs owning office space Industrial REITs owning warehouses and other industrial space

Retail REITs owning shopping malls and stores Resort REITs owning hotels and resorts

Residential REITs owning houses and apartments Healthcare REITs owning hospitals and nursing homes

Mortgage REITs owning mortgages Diversified REITs owning different types of properties

Now let's know about the Difference between a Real estate company and REIT.

A real estate company’s major objective is to develop real estate and derive benefits from it

REITs are mandated to have at least 80% of assets in a finished form and derive income from these properties.

Thus, the amount of risk involved in both of them is different with REITs having less risk given high amount of completed properties at disposal.

REITs are also created with the sole purpose of enabling everyday investors with access to invest in the real estate class.

Thus it enjoys tax advantages that are not present with real estate companies.

For example, any interest or dividends or any income that a REIT gets directly from its properties Or SPVs are exempt from all taxes.

Now let's talk about the Pros of REITs.

REITs provide the enormous investment benefits that the real estate class has without a massive upfront capital requirement.

It provides good diversification benefits to small shareholders who cannot afford to own different types of properties.

REITs help address the biggest issue of the real estate class which is illiquidity and the time taken to complete transactions.

REITs have all of their properties professionally managed to ensure minimal hassle for the actual asset owners.

It provides a regular & steady cash flow income due to the mandate of distributing 90% of its distributable cash flows to all shareholders.

REITs also provide the necessary capital appreciation which is the biggest draw for real estate investments.

Now let's know about the Cons of REITs.

Although REITs have tax benefits for the entity itself, it has no specific tax advantages for the investors of the REIT.

Thus all income to shareholders from REITs is taxable at the income tax rate.

It's subject to market risks with the real estate segment and provides limited diversification benefits that can counter these industry risks.

The rate of capital appreciation for REITs is slower than normal real estate companies due to the mandated limit of retaining 10% cash flows for a REIT.

Although they provide better liquidity than traditional real estate,

REITs in India are still on a small scale and are very less liquid as compared to stocks and fixed-income investments.

Now let's talk about Top REITs in India.

REITs are a major part of the real estate asset class in the USA with total gross assets above $3.5 trillion.

But REIT space in India is still very new and it was approved in 2014 only.

Thus the REIT space has limited options today with only 3 listed entities.

Embassy Office Parks REIT is the first REIT to be listed in India.

It is also Asia’s largest REIT in terms of the area owned.

The trust owns around 42.4 million sq feet of real estate.

It has an occupancy rate of 88.5% with 193 blue-chip occupiers including Google, Flipkart, JP Morgan, Cognizant, and many others.

The company has a weighted average lease expiry of 6.9 years. It has a NAV of Rs 388 per share.

It mostly owns office spaces along with a few hotel spaces and a solar park to provide power to its office spaces.

The trust has properties in

Bengaluru (74% of assets) Mumbai (10% of assets)

Pune (9% of assets) Delhi NCR (7% of assets)

In financials, Embassy Office Park REITs generated 8.43% returns in a year.

It's currently trading at 52.7 PE and 1.32 BV.

It operated 28.1 Net profit margin and 73 Operating profit margin.

Its Debt to equity ratio is 0.43 and 0.2 as the Current Ratio.

Second is Mindspace Business Parks REIT.

Mindspace REIT is sponsored by the K Raheja Group.

It has a total leasable area of 31.2 million sq feet of which 23.8 million sq feet is completed.

It has an occupancy rate of 84.4% with 165+ tenants including Accenture, Qualcomm, L&T, Barclays, Amazon to name a few.

The trust has a weighted average lease expiry of 6.6 years. It mostly owns office spaces.

The trust has properties in

Mumbai (41% of assets) Hyderabad (40.4% of assets)

Pune (16% of assets) Chennai (2.6% of assets)

In financials, Mindspace Business Park REITs generated 6.11% returns in a year.

Its Debt to equity ratio is 0.25 and 0.27 as the Current Ratio.

It's currently trading at 54.9 PE and 1.19 BV.

It operated 29.4 Net profit margin and 74.4 Operating profit margin.

Next is Brookfield India Real Estate Trust.

Brookfield REIT is sponsored by Brookfield AMC.

Brookfield is one of the world’s largest alternative asset managers with more than $600 billion of assets as of March 2021.

It has a portfolio of 14 million sq feet with rights to acquire 8.2 million sq feet.

It has an occupancy rate of 87% with 118 tenants including Accenture, TCS, and Cognizant.

The trust has a weighted average lease expiry of 7 years and NAV of Rs 317 per share. It mostly owns office spaces.

The trust has properties in

Gurugram (38% of assets) Mumbai (22% of assets)

Kolkata (22% of assets) Noida (18% of assets)

In financials, Brookfield India REITs generated 6.11% returns in a year.

It’s 0.41 is the Current Ratio.

It's currently trading at 1.06 BV.

It operated a -15.8 Net profit margin and 58.7 Operating profit margin.

So, this was all about REITs.

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On that note, here's me Gunjan Grover. Signing Off.

Bye-bye Take care

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