By Joydeep Sen
For taking exposure to any asset class, you can invest directly in that asset or go through an investment vehicle. Nowadays, along with growth of financial services, there are multiple investment vehicles that are managed by professionals. These vehicles offer you a facility or a service, for a fee, because professional services do not come free. For taking exposure to real estate as an investment, you can buy real estate as such, but there is an issue of liquidity.
Today we will discuss the vehicles that give you exposure to real estate as an investment. These vehicles invest in a mix of residential and commercial properties, as per mandate of the fund and opportunities in the market.
Real Estate Investment Trust (REIT)
A REIT is a pool of money from unit-holders for investment in real estate. The units of the REIT are listed at the exchange and are traded like equity stocks. In that sense, REITs are like exchange traded funds (ETFs) for investing in real estate as it is conceptually similar to mutual funds for investing in the underlying asset class. The typical structure of a REIT is that the holding entity bifurcates into multiple special purpose vehicles (SPVs) where each SPV owns one property.
The reason for having multiple SPVs is that there is proper identification and segregation of what is happening in each property where the REIT has invested. The REIT as such is usually structured as a Trust, or may be like a company also.
As per regulation, 90% of the taxable income of a REIT has to be distributed to unitholders as dividend. The income in REITs come mostly from rents from the properties they own, and to a limited extent, price appreciation of the properties. The fund manager looks for properties to optimise on the rental yield. The advantage of REIT is that you can buy as low as one unit (equivalent of one share) or as per your investment size, and take exposure in expensive properties which you otherwise cannot afford. However, for you as the investor, from purchase to sale, returns are a function of dividends received as well as purchase price and sale price in the secondary market.
Fractional real estate
Whereas REIT is a SEBI regulated structure, Fractional Real Estate (FRE) is an informal structure where an entity involved in real estate business or real estate services gets a set of investors together, pools the money through legal documentation and invests in a property that otherwise would have been unaffordable for one investor. Conceptually it is similar to REITs in that it is a pool for investment in real estate, with an eye on rental income. The differences are that in FRE, liquidity is difficult as it is unlisted at the exchange; you can exit only if another investor is willing to buy out your component. You get exposure to one real estate through this arrangement and get to know the property more in detail than in a REIT.
Mutual fund: Fund-of-funds
There is a MF Fund-of-Funds that invests in REITs in the Asia-Pacific region, mostly Singapore and Australia. This would give you exposure to REIT markets beyond India, which are more developed. This being an India domiciled fund, your investments will happen in the normal course, like any other MF investment.
The scope for capital appreciation in real estate investments does not look bright now, given the structural reforms such as RERA, demonetisation, GST, etc., and finally the pandemic-induced slowdown. Loans are available at attractive rates, but there are unsold inventories as well. Having said that, the rationale for investment in an asset class is to have a diversified portfolio. REITs and FREs are a play more on the rental yield than capital appreciation. Currently, though residential properties have muted rental yield, commercial ones offer decent yields, which you can avail of through these.
The author is a corporate trainer and an author