REIT investments are proving to benefit investors in emerging markets like India in comparison to developed markets.
Real estate investment trusts (REITs), which invest in public real estate, have long been a staple of diversified portfolios. REITs have offered competitive risk-adjusted returns, attractive income, and inflation protection over the long term in various market situations. However, given the structural issues that are more acutely hurting sectors, including office space, regional malls, and retail centres, there are a few that are questioning whether REITs are still a good investment. We believe that the changing makeup of the REIT sector will help to maintain these characteristics.
A stronger, more resilient REIT industry also emerged, led by management teams that learned and put into practice many valuable lessons, not least around balance sheet strength and structure. However, with the pandemic’s socio-economic impact, reviving homebuyer’s interest in even selling the existing inventory was a challenge. In fact, this humanitarian crisis has urged people to re-look their investment strategy so as to secure their future with far more financial stability.
Morgan Housel’s book “The Psychology of Money” mentions a study on investment habits conducted by well-known economists Ulrike Malmendier and Stefan Nagel of the National Bureau of Economic Research, which found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation—particularly early adult life experiences. This, to some extent, explains how generations of investors have always considered Real Estate to be a must-have asset in their investment portfolio. And because one is encouraged to make this investment much earlier in their earning years, it is often done by buying a home.
Traditional assets still have their charm. In fact, owning a property is probably the only investment that most risk-averse investor could consider over equity markets that can promise great returns in the long term minus the risks involved in stock markets. Interestingly, the pandemic bought about a tectonic shift in how people look at real estate as an investment and probably even made us less averse to high-risk investments that promise inflation-beating growth rates.
Today, many dual-income families who have been investing in more than a single property to increase their high yielding asset portfolio are now looking at equity markets, either through MFs or stock trading, as a possible avenue to maximise their wealth. And for those who want to explore the best of both, there are Real Estate Investment Trusts (REITs).
While India introduced REIT only in 2007, it has been a global investment focus for more than 50 years. Also, given the geopolitical situation and recent focus shift from China to India as a preferred investment destination, India presents a ready-made ground for commercial and manufacturing infrastructure development. With this insight, global investors are looking at India for better yields, and many international funds are venturing into commercial real estate investment in India.
The government has supported the Real Estate Investment Trust (REIT) investors in the country through regulatory modifications that allow them to put in their money more efficiently and also pitch in with their international experience in the management of REIT’s. The recent budget announcement also allowed easier participation by foreign portfolio and institutional investors in the Indian REITs by easing the statutory debt funding requirements.
The currently available REITs in India have already shown that they are suitable quality investments for people looking for long-term financial benefits. They have a better safety outlook against fraud as it’s managed by the Securities and Exchange Board of India (SEBI) and disclose their capital portfolio every six months.
Data accessed from JLL’s ‘The India REIT Opportunity’ report of November 2020 shows that the current REITs in India are a substantial investment opportunity. It also suggests that fund managers also prefer REIT as opposed to Infrastructure Investment Trusts (InviTs) based on the 735 Cr investment seen in 2020. With investments coming into REITs from foreign and domestic players, despite the ‘work from home’ culture setting in, growth in this sector will prevail.
That REITs are heating up as a destination for investment can be proved by the fact that even during the pandemic stricken year of 2020, the net absorption of real estate was quite high. There are also strong indicators that show that the net absorption in 2021 will be over 30 million square feet. This stems from India Inc’s ongoing efforts towards self-reliance in line with the Government’s Aatmanirbhar Bharat agenda. This will undoubtedly fuel the real estate sector, which will add to the international and domestic confidence in REIT.
As we look toward the new normal, REIT investments are proving to benefit investors in emerging markets like India in comparison to developed markets. This will usher increased investments both nationally and internationally, bringing world-class infrastructure and management to our footsteps.
(By Gopalakrishnan J., Executive Director & Group CFO, Shriram Properties Limited)