INDIAN investors are now looking beyond the traditional asset classes like bank deposits, equities, mutual funds and physical real estate as investment avenues. They have started exploring alternative asset classes as a way of trying to increase their returns and/or diversify risks.
One such asset class that is gaining popularity is real estate investment trust (REIT), which is like an investment or a fund. These are in the form of pooled funds of investors that offer an opportunity to diversify investments across various real estate segments with a smaller capital base (unlike the case of fully owning a commercial real estate, which requires a large capital base) and ensure high dividend yields. The funds invest in portfolios of commercial, pre-rented properties such as shopping malls, office buildings and hotels and distribute the rental income periodically/quarterly. In addition to the rentals, the investors also share the capital appreciation whenever the property is sold.
REITs are set up as corporations or business trusts. They are either public or private enterprises. Public REITs are open to the general public and are listed on one of the major securities exchange. Private REITs are generally restricted to fewer (mostly institutional) parties.
HNIs have, for a long time, been investing in commercial real estate and enjoyed nominal rentals. With a transformation in the real estate sector over the past few years, the focus has shifted towards Grade-A commercial properties such as IT parks, large commercial buildings, offering world-class amenities. These properties offer good rentals from established and reputed tenants as a result of which, Indian investors are currently enjoying annualised commercial rental yields, as high as 11-13% (against other countries that have yields as low as 3-4%), apart from annual capital appreciation. Thus, over the life of the investment, rentals can pay back almost half the invested corpus through yields, thereby providing some amount of safety to the portfolio.
REITs have been a popular form of investment vehicle in the developed markets, especially in the US, the UK, Australia, Japan and Singapore. The concept of REITs is still taking form in most of the Asian markets. In the US, REITs have a tax advantage like mutual funds on the distribution of income. In India, there is no legislation yet for the establishment of REITs. Although Sebi has issued draft guidelines for REITs for discussions, final regulations are still awaited. If tax benefits were made available in India, it will boost the retail investments in REITS, providing an alternate asset class for investments.
Despite all the legislative glitches, REITs are soon going to carve out a niche for themselves in the Indian market and grow exponentially, given the development pipeline. Moreover, the growing popularity of REITs clearly demonstrates that realestate investments require strict due diligence and sectoral expertise. Investments through venture or private equity route allow better negotiations, making these decisions yield stable returns even during an economic downturn.
However, the Indian realty market also needs to develop on the back of a research-driven, structured, investment approach, which has a long-term perspective. Investors should judiciously choose investment managers, with a talented pool of individuals having an established investment pedigree and track record of returning capital and providing returns to investors. It is important to spread one's investment across various asset classes available, allowing overall stability to the portfolio.
