April 1, 2019 will always be remembered as a red letter day for the Indian realty sector as on this day the very first Indian REIT was listed by the Blackstone-Embassy Group. REIT or the Real Estate Investment Trust is a boon to the commercial real estate sector and is facilitating growth avenues to it. REITs have a proven and successful track record in several Asian countries such as Japan, Singapore, Malaysia, Thailand, etc. REITs enable small and mid-level investors to invest in Grade-A commercial assets. Minimum annual returns of these investments range from 7-8% and can go up to as high as 12-13%, depending on the quality of the underlying assets.
The commercial sector has started showing green shoots of recovery with liquidity crisis clearing out. With REITs, the biggest advantage to the retail investors is the ease of investment. Investing in REITs is just like investing in direct equity and can be done through a DEMAT account. The other big benefit is getting an opportunity to invest in commercial properties that will earn rental income. This is a big advantage as commercial properties yield higher rental returns than residential properties.
Further, REIT regulations mandate the distribution of 90% of the rental income to unit holders, while the remaining 10% can be utilized for the business purpose. Apart from the rental income, any increase in the value of units also adds to overall capital appreciation. The introduction of REITs has also promoted professionalism throughout the commercial real estate sector. Considering the increasing demand, NRI investments and interest in the sector have risen with the introduction of REITs.
REITs, if encouraged for individual retail investors in India, are capable of changing the nature of property investment. They may give retail investors an easy access to the high-value property, which was a domain previously reserved for large institutional investors.
Overall it can be said, being in a nascent stage in India, REITs might face a few early challenges, but in the long term, the success of REITs will have a direct impact on the success of the commercial real estate sector in India.
(By Ravish Kapoor, Managing Director, Elan Group)