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.



--- Advertisement ---
Our Top Recommendation for 2020

What makes our top recommendation for 2020 an opportunity one cannot afford to miss?

It has the potential to be extremely lucrative. And yet it's relatively safe.

And today, you have the opportunity to get in on it.

Go ahead, access full details of our top recommendation for 2020 here...
------------------------------


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

Stocks to Ride the Covid-19 Rebound podcast (Views On News)

May 29, 2020

The Covid-19 crisis could be the best investing opportunity in a decade in small-cap stocks, for discerning investors, when the market rebounds.

What You Should Know About the India Vix (Fast Profits Daily)

May 29, 2020

The India Vix is one of the most commonly tracked numbers in the stock market. But what does it mean and how can you use it? In this video, I'll show you what the Vix is all about...

The Locusts Are Coming! Are You Buying the Right Stocks? (Profit Hunter)

May 29, 2020

The locust swarm has produced winners in the stock market. Read on to know more...

These Stocks Can Make You Incredibly Rich in 2020 and Beyond podcast (Views On News)

May 28, 2020

Good quality stocks do not give good long term returns all the time. We take a look at the important factor that influences stock market returns other than business quality.

Why Aditya Birla Sun Life Mutual Fund Stopped Accepting Fresh Investments In Its Two Debt Schemes... (Outside View)

May 28, 2020

This Daily Wealth Letter, explains the key reasons why Aditya Birla Sun Life Mutual Fund has temporarily suspended in two debt schemes -- Aditya Birla Sun Life Medium Term Fund and Aditya Birla Sun Life Credit Risk Fund.

More Views on News

Most Popular

What the RBI's Rate Cut Means for Options Traders (Fast Profits Daily)

May 25, 2020

The RBI governor has cut the repo rate to 4%. What does this mean for options traders? Find out in this video.

6 Charts Showing the State of Indian Financial Markets in 2020 (Sector Info)

May 26, 2020

Six charts showing how Indian financial markets have performed in 2020 so far...

This 'Essential Product' Smallcap is a Must Have for a 'Covid-19' Immune Portfolio (Profit Hunter)

May 19, 2020

This smallcap company needs no stimulus measures to do well in the long term.

Which Stocks Should You Buy, Sell, and Hold in the Market Today? (Profit Hunter)

May 21, 2020

The coronavirus led uncertainty refuses to go away from the markets. Here's what retail investors should do with their stocks...

More

Get Rich as the
Market Rebounds from Covid-19

Coronavirus Rebound
Get this special guide, authored by Equitymaster's top analysts, now.
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


May 29, 2020 03:35 PM

MARKET STATS