REITs: The Big Investment Theme of 2022

Commercial real estate as an asset class has been out of reach for an average Indian investor.

Let's be honest. Many of us aspire to own commercial properties in the most prestigious localities and rent them out.

Real estate investment trusts or REITs have made this fantasy come true for many investors.

REIT is an entity which pools in resources from various investors and then collectively invests in real estate to earn capital appreciation and dividends. This investment vehicles buys, sells, and manages real estate assets on behalf of investors.

REITs allow you to invest smaller amount of your savings into real estate which otherwise would not have been possible.

All this is done in a hassle free and convenient way without you getting involved in the long process of owning a property.

Simply put, REITs are to real estate what mutual funds are to equity markets. They're publicly traded like common stocks on the stock exchanges.

The first REIT in India was listed back in April 2019. So why are we talking about REITs now, after almost three years?

Well, in the current market scenario when inflation in the US is at a 40 year high (stock markets don't like high inflation), REITs have emerged as a new investment avenue.

It's increasingly getting difficult for an investor to find out a high-yielding asset class to invest in. That's where REITs come in. They could inflation proof your portfolio.

Many are calling it the investment theme for 2022 and rightly so.

Let's understand why experts are going gung ho over REITs...

• Steady payouts

  In recent years inflation has been muted. But now, inflation is back big time. So, you need a hedge.

  While we have gold and other investment options in a rising inflationary environment, here's how investing in REITs help beat inflation.

  Property prices and rental income tend to rise when inflation rises. In fact, someone who has purchased a property using a fixed rate of interest loan could benefit during high inflation. This supports REITs' dividend growth and provides a reliable stream of income even during inflation.

  REITs are required to distribute to unit holders not less than 90% of its net distributable cash flows in each financial year. This makes them very attractive for anyone who is looking for a regular income.

  So REITs have a checkmark in terms of steady payout.

• Portfolio diversification

  When high risk assets like stocks are performing well, a low risk asset like gold typically won't. When stocks are down, gold is generally stable or up.

  In the same way, real estate is largely driven by almost completely distinct set of factors than what drives stock prices.

  That is why you need REITs in your portfolio. It offers the advantage of diversifying your portfolio and participating in the property market. That too without the hassles and with a minimum investment.

  Budget 2022 already laid the ground work for a massive capex boom. The focus is clearly shifting to growth at the expense of inflation.

  REITs will help you cash in on the capex boom.

  Apart from this, the demand for real estate is also picking up. A survey showed that around 75% wealthy people will look to buy luxury properties, worth more than Rs 50 m, over the next two years in big cities as well as in holiday destinations.

  That's for wealthy people. But what about the affordable housing?

  Well, the growth in affordable housing over the next few years is likely to be strong as around 22% of the population still do not have adequate housing. With the situation improving gradually, there's already a turnaround in sentiment for the real estate sector.

  By mode of portfolio diversification, REITs can take advantage of the real estate boom.

• Reopening of the economy is good for REITs

  Initially, REITs became very popular because of the dividend yield they offered.

  However, ever since the pandemic, the listed REITs on Indian bourses started to broadly underperform the Sensex. This was because of the growing popularity of work from home. There was uncertainty about the future demand for office spaces.

  But now, companies have called their employees back to office and normalcy is returning. This bodes well for REITs and make them an attractive asset class to invest in.

An overview of listed REITs in India

In India, there are currently three listed REITs - Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust REIT.

Let's take a look at each one...

#1 Embassy Office Parks REIT

Embassy REIT is India's first publicly listed REIT.

It owns eight high-quality office parks and four prime city centre office buildings with 33.6 million square feet (MSF) of completed leasable area.

It also has an under construction and development pipeline of 9 MSF.

In addition to the offices, it also owns two operational hotels with 477 keys, an under-construction hotel with 619 keys, and a100 MW solar park.

The company is backed by Blackstone Group, which has been actively investing in the Indian real estate market since 2010.

For the quarter ended December 2021, Embassy REIT declared a payout of Rs 4.9 bn or Rs 5.20 per unit. For fiscal 2022, Embassy REIT has now cumulatively declared year to date (YTD) distributions of Rs 15.6 bn or Rs 16.50 per unit.In fiscal 2021, it had declared a cumulative distribution of Rs 21.48 per unit of Rs 18.4 bn in total.

The quarter under review was a good one for Embassy REIT where it saw rental collections of over 99%, similar to last year.

The REIT's IPO price was Rs 300. Since its listing in early April 2019, the stock has risen 24% to Rs 388 as of Monday's close.

For 2022, the company has upped its guidance and will declare Rs 21.70 per unit despite the Omicron wave marginally affecting some segments.

This would result in a dividend yield of 5.7% on the current price.

Another key metric which investors need to consider is the book value of the REIT. Like mutual funds declare their net asset value (NAV) daily, REITs disclose their NAVs semi-annually or annually.

So it's important to check whether the REIT is trading at a discount or at a premium to its book value.

Embassy REIT is currently trading at a discount of 2% to its book value of Rs 388.26 as on March 2021.

#2 Mindspace Business Parks REIT

Mindspace REIT was the second REIT to list on Indian exchanges. It is managed by the K Raheja Corp Investment Managers.

In the most recent quarter, Mindspace Business Parks REIT leased over 1.8 m square feet office spaces, taking its overall leasing to nearly 4 m square feet for the first nine months of the financial year.

It declared distributions of Rs 2.8 bn or Rs 4.64 per unit for the December 2021 quarter with most of it being tax-exempt. In the September 2021 quarter, it had declared a distribution of Rs 2.7 bn or Rs 4.60 per unit.

In fiscal 2021, the cumulative distribution to unit holders was 9.59 per unit.

The Mindspace IPO offer price was at Rs 275 per unit. It has gained 19% since its listing in early August 2020. Its units currently trade at Rs 358.

Mindspace REIT offers a dividend yield of 5.2% while it is currently trading at a premium of 4% to its book value of Rs 345.2 as on March 2021.

#3 Brookfield India REIT

The last one to join the party was Brookfield India REIT.

Brookfield India Real Estate Trust REIT is an India-based commercial real estate vehicle. The investment trust's portfolio consists of campus-format office parks. Its commercial assets are located in Mumbai, Gurgaon, Noida, and Kolkata.

For the quarter ended December 2021, Brookfield REIT declared Rs 5 per unit in dividend to unitholders on the back of strong leasing momentum. It leased 5.36 lakh square feet office space across its assets with additional expansion options of 2.91 lakh square feet during the quarter.

The recent payout takes the cumulative dividend distribution for fiscal 2022 to Rs 17 per unit.

The units were offered at Rs 275 per share. Currently, they trade at Rs 311.

Out of the three, Brookfield REIT has the highest dividend yield at 6.5% and also the highest occupancy rate.

It is currently trading at a discount of 3% to its book value of Rs 317 as on March 2021.

As can be seen, the listed REITs are offering good dividend yields through quarterly distribution which cumulatively amount to more than 6% at their current prices.

An important point to note here is that the 3 listed REITs in India deal with 'A' grade office space and boast of quality assets, leased to the best companies across the world. That's why even in the pandemic, their collections were around 99%.

According to Anarock, a leading real estate services company, leasing activity has picked up pace and is already witnessing growth. All the three REITs have declared their results for the quarter which indicate the positive trend.

In conclusion...

Surely, you will be excited now to take a close look at REITs and diversify your portfolio. But there are a few things to remember before you invest.

The main motive of REITs is to generate income and not earn capital gains. REITs are to provide an income stream in the form of rents/interest and leave some scope for capital appreciation.

So if you are investing in REITs, you need to understand their income generation capacity for a given period. You'll have to check their cash flow stability.

For instance, if a REIT doesn't see optimum occupancy post-pandemic or loses its negotiating power with customers, then it would earn a lower distributable surplus.

Now comes an important point: The tax on the dividend payouts declared by REITs.

The dividends earned from REITs are included in your total taxable income and taxed as per the slab applicable to you.

But that's not always the case.

For instance, Mindspace REIT distributes over 90% of payouts in the form of tax-free dividends. The other two - Embassy and Brookfield are still working on improving these measures. Brookfield's latest payout of Rs 5 per unit only considered 34% of this to be tax-free.

To conclude, REITs are catching up big time which is proving to be good for the real estate sector.

The performance of listed REITs has opened the door wide open for real estate companies to come out with their REITs. Going forward, we may see more REITs to be launched in India.

Developers such as Oberoi Realty, DLF, Prestige Estates, and Phoenix Mills, who own sizeable commercial property assets, may come out with their REITs.

As we discussed above, the three listed REITs in India deal with 'A' grade office space and boast of quality assets. They have the best tenants.

But this could change in future as more REITs are rolled out. So always stick to the highest rated REITs.

As more REITs list over time, there will be more options available to investors. Either way, this is one space that retail investors need to track in 2022. This asset class can be a safe way to beat inflation.

Happy Investing!

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