REIT is a company that owns and operates income generating real estate. Like Mutual Funds, REITs pool capital from numerous investors to invest in commercial properties. In return investors receive Income in the form of dividend & interest at regular intervals
Access to income generating real estate with as low as Rs. 300
SEBI regulations require REITs to payout 90% of distributable cash flow
Arising from increase in value of underlying real estate over time
Across geographies & tenants. Eliminates concentration risk
Compared to physical real estate, REITs are listed & traded on exchanges
Ensures optimal return on investment, transparency & accountability
Average expiry period of all the leases within the property
Area which is unoccupied but for which letter of intent/ agreement to lease have been signed
Percentage of all available units in a rental property that are vacant or unoccupied
Net Operating Income and EBITDA should be consistently increasing
NAV is the net value of a fund's Assets less its Liabilities, divided by Number of shares/units outstanding.
A Real Estate Investment Trust (“REIT”) is an entity that owns & operates income-producing real estate. REITs pool capital of numerous investors (just like a mutual fund) to invest in large-scale, high-value income producing real estate. This makes it possible for individual investors to earn income/dividends from real estate investments without having to buy, manage or finance any properties themselves. REITs invest in a wide range on properties including office building, apartments, cell towers, hotels, data centers, warehouses, malls, cold storage, etc.
A REIT is set up in the form of a trust registered with Securities and Exchange Board of India (SEBI). The sponsor or the investor who creates the trust, transfers ownership of the properties to the REIT in exchange for units. The sponsor holds a certain minimum percentage of the total units and makes an Initial Public Offer (IPO) of remaining units within three years to get REIT listed on the stock exchange. Post issuance, investors hold the REIT units just like mutual fund units.
REITs have a three tier structure which includes Sponsor, Trustee and Manager.
Sponsor: The sponsor is the entity who forms the REIT. They set up the REIT and transfer the properties/real estate owned by them to the trust. A real estate developer desiring of raising funds plays the role of a sponsor in a REIT
Trustee: The trustee is a person appointed by the sponsor, who holds the assets on behalf of the unitholders.
Manager: The trustee appoints a manager who manages the REIT assets and is responsible for making investment decisions. The manager is typically a private company closely held by the sponsor
REITs generate returns for investors in three ways –
Dividend Income: REITs are required to distribute at least 90% of its net distributable cash flow i.e. rents minus the expenses to manage the properties, as dividends at least twice a year. The dividend payouts can rise if rental rates rise or if the REIT builds additional properties and leases them out. Higher the rent, higher the dividends.
Interest Income: REITs can distribute interest income that it earns on loans given out to its subsidiaries. Most REITs do not own properties directly. Instead, they hold stakes in Special Purpose Vehicles (SPVs) which, in turn, directly hold the properties. REITs lend money to these SPVs for constructing or managing a building and the SPVs in turn repay those loans back with interest to the REIT over time.
Capital Appreciation: The price of an REIT’s units can rise or fall over time just like stock prices and result in capital gains or losses for the investor. Higher incomes due to rent escalation clauses and on-boarding of new properties lead to a re-rating of an REIT unit’s price.
Investors have multiple ways to invest in REITs. You can buy / sell the units through ICICI Direct platform as the REITs are listed on the stock exchanges.
Also, an investor can apply to the Initial Public Offering (IPO) of the REIT. The minimum application value will range between Rs. 10,000 – Rs. 15,000.