X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Should You Be Investing in India's First REIT? - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Should You Be Investing in India's First REIT?
Mar 19, 2019

Do you aspire to own commercial properties in the most prestigious localities of India's leading cities and rent them to Multi-National Companies (MNCs)?

It might look like a pipedream to many of you.

Now earning rental income by leasing out 'grade-A' properties in cities such as Mumbai, Pune, Bengaluru, and Noida will become a possibility for individual investors now.

Are you puzzled at how?

Real Estate Investment Trust (REIT) has become a reality.

Blackstone-backed Embassy Office Parks has unveiled the REIT IPO (Initial Public Offer). It aims to garner Rs 4,750 crore through the IPO which will be open until March 20th for a subscription. The REIT has set a price band of Rs 299-300 per unit for IPO.

It has already raised Rs 1,743 crore from marquee anchor investors such as Kotak Mahindra Life Insurance Company and trusts linked to high-profile investors such as Radhakrishnan Damani among others.

The Embassy Office Parks will utilise Rs 3,710 crore for the repayment of debt; Rs 460 crore will be utilised for the acquisition of an asset.

The minimum investment amount in a REIT is Rs 2 lakh. Post-issue the units will be listed on stock exchanges and will be available for trading.

What's REIT?

Like mutual funds, it's a trust that pools money from investors. But it invests in large-scale income yielding real estate properties. The major difference between REITs and conventional real estate developers is, in most cases, REIT develops and buys properties to run them, whereas conventional real estate developers are primarily interested in selling the properties to investors and end-customers.

Hence, you shouldn't confuse investing between Embassy Office Parks REIT, which is the current offering and investing in Embassy Property Developments Pvt. Ltd., which isn't an offer at the moment.

It is mandatory for a REIT to:

  • Hold at least 80% of its portfolio in finished properties generating income, and 20% can be invested in under construction properties.
  • Distribute at least 90% of their net distributable cash flows among unitholders. Embassy REIT intends to distribute such cash flows at least once a quarter every financial year.
  • Declare Net Asset Value (NAV) at least twice a year.

Know more about Embassy Office Parks REIT

According to the Offer Document filed with SEBI, Embassy Office Parks owns 32.7 million square feet of commercial office space through seven office parks and four office buildings at prime locations in Bengaluru, Pune, Mumbai, and Noida. Besides, its real estate portfolio comprises of four hotels and a solar energy park as well.

As on December 31, 2018, Embassy Office Parks reported a committed occupancy of 95% with over 160 prestigious tenants accounting for 81% of gross rents. Its tenants include some tech-giants such as Google, Microsoft, and JP Morgan among others. As it claims, Embassy Office Parks has been able to command 33.6% higher rents as compared to in-place rents due to the quality of its properties.

Taxation:

According to the offer document, the interest and rent components of distributions is taxable at the applicable ordinary rates. Balance distributions, if any, will be exempted from tax.

On the other hand, short-term capital gains from the sale of units will be taxable at 15% and long-term capital gains will attract 10% tax. Here, profits arising from the unit held for more than 36 months are construed as long-term gains, else short term gains.

What are the risk factors?

Post-listing, liquidity on stock exchanges would be subject to active buyers and sellers. As per the rules applicable to REITs, the NAV can be declared only twice a year, which might create some transparency issues.

Moreover, the distribution income is subject to distributable cash flows.

Institutional investors are better equipped to invest in less-liquid assets and crack over-the-counter deals with other interest buyers/sellers.

Should you invest?

Returns generated by REITs are unlikely to be at par with those produced by real estate investments. The aim of this asset class, REIT, is to provide an income stream in the form of rents/interest and leave some scope for capital appreciation.

According to property experts, 'grade-A' properties typically enjoy rental yields of 7%-9% and may witness the capital appreciation of 3%-7%. In other words, the total returns from REIT investment would be in the range of 10%-16%. A realistic return expectation would be towards the lower end of the spectrum.

Embassy Office Parks REIT is the first-of-its-kind IPO in the Indian market. As there isn't another comparable product in India, retail investors would be better off staying away from this IPO.

Since mutual funds are also allowed to invest in REITs, you should leave the decision of investing in Embassy Office Park REIT to them. As of now, they are treading cautiously, and fund houses haven't made any encouraging comments either.

[Read: Is The Mutual Fund Industry Ready To Invest In REITs, InvITs?]

If the first few issues of REITs are successful, Indian investors will get another asset class to diversify their portfolio.

While investing, pay attention to your personalised asset allocation to achieve your financial goals.

Happy Investing!

PS: Are you looking for "high investment gains at relatively moderate risk"? We have a ready solution that could be suitable for you -- PersonalFN's Premium Report, "The Strategic Funds Portfolio For 2025( 2019 Edition)".

Click here to know more!

Author: PersonalFN Content & Research Team

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Should You Be Investing in India's First REIT?". Click here!

  

More Views on News

BSE Sensex Surges 791 Points; INDUSIND BANK Among Top Gainers (Market Updates)

May 23, 2019 | Updated on May 23, 2019

Markets all time high analysis : The BSE Sensex Surged 791 Points; INDUSIND BANK Among Top Gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at equitymaster.com.

BSE Sensex Surges 902 Points; YES BANK Among Top Gainers (Market Updates)

May 23, 2019 | Updated on May 23, 2019

Markets all time high analysis : The BSE Sensex Surged 902 Points; YES BANK Among Top Gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at equitymaster.com.

BSE Sensex at All Time High; INDUSIND BANK Among Top Gainers (Market Updates)

May 23, 2019 | Updated on May 23, 2019

The BSE Sensex is trading at its all - time high of 39,893(up 2.0 %).Among the top gainers in the BSE Sensex today are INDUSIND BANK. In the meantime, the NSE Nifty is trading at 11,947(up 1.8 %).

A Crucial Thing to Bear in Mind as You Watch Modi Take the Prize Today... (Profit Hunter)

May 23, 2019

The day has arrived; vote counting has begun. While the final results are yet to be announced, the election trends suggest a clear victory for Narendra Modi. What should you, as a long-term investor be doing next? Read on...

Seven Mistakes To Avoid While Investing Online In Mutual Funds (Outside View)

May 22, 2019

PersonalFN explains the mistakes you should avoid while investing online in mutual funds.

More Views on News

Most Popular

My Top 7 Stocks to Profit from Sensex 100,000(The 5 Minute Wrapup)

May 16, 2019

Tanushree Banerjee explains everything you need to know about the Rebirth of India and Sensex 100,000.

3 Indian Stocks Replicating Amazon's Successful Strategy(The 5 Minute Wrapup)

May 10, 2019

The one critical element that has made Amazon a force to reckon with...

3 Stocks to Bet on to Become a 'Dividend Millionaire'(Profit Hunter)

May 14, 2019

As markets continue to rattle amid earning season, upcoming elections, volatile crude price and US China trade war, it's a great idea to add some stability to your portfolio by adding dividend stocks.

Indian Steel: The Perfect Multibagger Opportunity(Profit Hunter)

May 17, 2019

A structurally strong Indian Steel Industry will help India achieve 8%+ GDP growth in the coming years.

The Bitter Pill that Will Lay the Foundation for Sensex 100,000(The 5 Minute Wrapup)

May 14, 2019

These companies will help the Sensex more than double from current levels.

More

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


May 23, 2019 10:47 AM

MARKET STATS