REIT is eventually a product that, like any other investment, has its own strengths as well as shortcomings. A due-diligence of any REIT will be needed prior to buying units in the hope of distribution yields and capital appreciation.
In the current times, as returns from most investments are undergoing a phase of uncertainty, interest rates are in a delicate balance, the threat of inflation is rising along with drop in incomes, and multiple such challenges; the avenues for institutional as well as retail investors are getting increasingly limited.
Particularly, the retail investor is treading a very difficult path, as he weighs various fixed income products. At such a time, a REIT (Real Estate Investment Trust) could be one of the viable alternatives. While there is no denying the fact that REITs could have its own challenges, a professionally-managed and publicly-traded REIT could still be a reliable choice, according to a research report by FICCI & Savills India.
Before investing in a REIT, it is natural for investors to compare REITs with equity products and mutual funds as well. Thankfully, India’s sole REIT has generally outperformed the market, not merely in normal circumstances but even during the ongoing pandemic.
“Since the IPO and listing in 2019, Embassy Office Parks REIT has shown an appreciation of 8% (As on 9th July 2020), reaching a maximum appreciation of around 50% in the pre-COVID phase. It is to be noted that the BSE Sensex and S&P BSE Realty Index registered negative returns in the comparable timeframe at -5% and -8%, respectively. Similarly, almost all the mid-, large- and small-cap mutual funds delivered a negative return since the beginning of this year,” the report says.
Diminishing Returns in Other Investment Avenues
While secure investments remain a priority, the Indian retail investor is also faced with a long trend of decreasing returns. Currently, most safe investment options, including public provident funds, fixed and recurring deposits, post office and savings bank deposits are at near all-time low returns as compared to historical high figures.
Better on Tax Comparisons
Pre-tax yields of REITs have proved to be better than most widely used investment options in the country. Interestingly, the yield gap widens when we take tax into consideration. The dividend portion of income from REIT being nontaxable, lends a significant advantage to a retail-investor.
Post-tax returns of REITs are almost twice or more than fixed deposits, recurring deposits, government bonds and other classes. Although PPFs provide higher returns and are non-taxable as well, the lock-in period involved in the relatively illiquid instrument, is a deterrent for investors – specially those in the younger age bracket.
REITs, on the contrary, much like pure equity products allow the ease of entry and exit to the retail investor at any point of time.
Strong Legal Framework
A strong regulatory framework shaped by SEBI in consultation with various stakeholders ensures protection of interests of the investor, especially the REIT unit holder. Since the draft REIT guidelines, there have been multiple amendments to regulations and multiple tax reworkings to make REITs an attractive option of investment.
As recently as in early 2020, the government, after consultation with multiple stakeholders, went against a proposed regulation aimed at taxing the divided income at end of the unit holders. “This showcases the seriousness of the regulatory bodies in promoting REITs and should provide a strong sense of conviction for the public at large to invest in REITs,” the report notes.
Industry experts say that time-tested fixed income products have usually been preferred by retail investors in India. However, range-bound post-tax returns barely provide a clear or discernible choice, except perhaps the PPFs.
“The returns from a REIT, on the other hand, could bring some hope for such a retail investor. Indians have had a generally positive experience from the only REIT during the last one year – including this difficult phase of 2020. Agreeably, just one REIT doesn’t make the complete story. But, it certainly provides an interesting glimpse into this real estate based derivative. I believe, the experience has created some favourable ground for REITs in near future,” says Anurag Mathur, CEO, Savills India.
“In the more recent times, the COVID-19 pandemic has impacted everyone globally and the CRE (Commercial Real Estate) market is no different. REITs and CRE market, in general, may feel pressure on rental cashflows in the short term as tenants seek rent waivers/ deferments or alternatively look at renegotiating lease contracts/ vacating the premises due to their financial instability. However, given that India continues to be top IT outsourcing destination globally due to the availability of talent pool, cost arbitrage and high quality infrastructure, commercial real estate will continue to be a resilient, low risk and high return asset class,” says Sanjay Dutt, Joint Chairman, FICCI Real Estate Committee & MD & CEO, Tata Realty & Infrastructure Limited.
It is a fact that there will be more REITs soon and in the long term in the country. In the current scenario, the equity REITs in the country will mostly operate based on the strength of underlying office real estate.
REIT is eventually a product that, like any other investment, has its own strengths as well as shortcomings. A due-diligence of any REIT will be needed prior to buying units in the hope of distribution yields and capital appreciation. As more REITs go for public listing, the investors will find greater choices and an entirely new set of derivatives to choose from.