Your first home or the home in which you reside may be considered as an investment by some owners, but many financial planners do not even include it while calculating one’s net worth. However, any house property or ownership of a piece of land or real estate in addition to one’s own occupied property may easily be called an investment. Investors look for capital appreciation and also a regular income in the form of rental income from investments in real estate.
The investment in real estate comes with its own share of difficulties and shortcomings. Now, with the introduction of the Real Estate Investment Trust (REIT) in the Indian investment space, those investors who do not wish to invest in physical real estate may consider investing in REIT.
The Embassy REIT IPO is the first listed REIT in India whose IPO was priced at Rs 300 and closed at a price of Rs 314.67 on April 1, its first date of the listing. On April 8, it was trading at Rs 323.11.
Rajeev Thakkar, Chief Investment Officer and Director, Parag Parikh Financial Advisory Services (PPFAS), explains the downside of investing in physical real estate and how REIT overcomes the various shortcomings. Aptly enough, Rajeev calls REIT as the ‘mutual fund for real estate’. There is, after all, a professional manager who invests the pooled funds into the real estate asset class. Buying REIT units is much simpler, cheaper and less time-consuming.
Investors who wish to diversify across asset classes may consider investing in REITs to bring in diversification in their portfolio. The correlation between equity, debt and real estate may not be strictly in tandem and hence diversification may help bring in more stability and growth to one’s investment portfolio.
Here is the full video:
On the eve of the launch of India’s first REIT, Rajeev Thakkar explains the nuances…
Here, as per the video, let us look at some of the inherent shortcomings of investing in real estate and how REIT can come handy in addressing them.
Owning a piece of land or a ready-to-move-in property especially in a popular location may cost a bomb. Depending on the carpet area of the house and the location, the prices vary and a typical 3 BHK could cost anything upwards Rs 90 lakh in NCR. Cities like Mumbai, Bengaluru may have even higher price tags in some locations. One needs to pay up the entire amount and owning in part is not possible. A particular location may be looking promising but one just cannot own a part of the flat and hence investing in the physical real asset as an asset is mostly a privilege to only those who can afford it.
How REIT helps: In REIT, one can own a part of the real state asset in smaller units. The minimum investment in case of Embassy REIT was Rs 2.4 lakh during the IPO offer and once it gets listed, the minimum will be Rs 1.2 lakh.
Let’s say you have invested in a real estate property and the price appreciates over time. Booking partial profits while keeping your principal invested is not possible. You will have to sell the entire property to book gains. Further, real estate is an illiquid asset and the availability of the buyer who is willing to buy at our price is important.
How REIT helps: In REIT, one may even book profits as and when the units are trading at a price above the purchase price. The only constraint could be the liquidity as one may not find enough buyers when you want to sell the units.
Real estate market is highly opaque. The last traded price at which a specific property was bought or sold in your neighbourhood could be hard to guess. At what price has the registration of the property taken place in your area is something difficult to find out. Owing to various reasons, no two properties in the same lane or the neighbourhood are bought or sold at the same price.
How REIT helps: REIT is listed on stock exchanges and the operation is under the radar of the market regulator SEBI. Adequate guidelines and monitoring take care of the unit pricing and the valuation of assets.
Investing in property and putting it on rent brings along the concerns of finding the right tenant and issues range from timely rental payments to keeping the property in good condition. There is no such concern in case of investment in REITs.
In the purchase of a real estate property, there are a plethora of charges including registration cost, stamp duty, expenses towards water and electricity connections, legal costs etc. In addition, based on the area of your dwelling the maintenance cost to be paid to the society’s welfare organisation will vary and there could even be an escalation clause. Lastly, there is a brokerage cost if you have bought it through a broker and not directly dealt with the seller. Also, there could be big-ticket maintenance of your flat which you as the owner has to bear and not the tenant.
How REIT helps: There are no such overheads in REIT and thus expenses and additional costs are kept under control. In REIT, the prominent charges are the fund management cost and the cost of maintaining the demat account.
A big put-off in the industry is the delay in the delivery of flats to the home buyers. The possession takes anywhere between 4 to 9 years and in some instances more. With RERA in the scene now, hopefully, builders stick to their deadline as promised in the affidavit. There is no such problem of delays in the case of REIT.