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Guest Column ABC of REITs

ABC of REITs

REITs give an opportunity to earn regular income through rents without owning a physical property.
Chanchal Wankhade Mar 12, 2019

REIT (Real Estate Investment Trust) is just like mutual funds that collects money from investors and invest in real estate properties both commercial and residential to generate fixed income through rents. Simply put, with REITs, investor can invest in real estate without owning it physically.

REIT can earn rent on monthly, quarterly, half yearly or yearly basis. In India, REITs pay dividend on half yearly basis. In India, REITs can invest in properties that are completed or 80 percent completed.

REIT is relatively new in India but well known in developed markets such as US. In 2014, SEBI came out with regulations on REITs, which was last amended in April 2018.

Recently, SEBI has reduced minimum investment amount in REITs from Rs.2 lakh to Rs.50,000 to attract retail investors. REITs are liquid as investors can buy or sell units of REITs on stock exchange platforms such as NSE and BSE.

Structure of REIT

Like an AMC, REITs too require sponsors to establish the trust.

Other key stakeholders of REITs

Fund Management Company: A fund management company takes care of day to day business of the REIT. It operates and manages the property of the REIT. For this, it charges a fee called Funds From Operation (FFO).

SPV: The Special Purpose Vehicle (SPV) is a separate legal entity. The SPV is a distinct company with its own assets and liabilities, as well as its own legal status. SPVs are created for a specific objective; often it is created to isolate financial risk. As it is a separate legal entity, if the parent company goes bankrupt, the SPV can carry its obligations.

Real Estate Assets: SPV can hold various real estate assets. This may include owning the building, corporate office, mall, data centres, hotels, Industrial park, healthcare space etc.

Types of REITs

Equity REITs: Equity REITs are responsible for acquiring, managing, building, renovating and selling real estate. The income mainly generated from rental income from their real estate holding. Equity REITs typically invest in office, industrials, retail, residential, hotel and resort properties.

Mortgage REIT: Mortgage REITs deal with mortgaged properties. These REITs lend money as mortgage to owners of real estate, purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans. World over, 10% of REITs are mortgage REITs; these REITs make loans secured by real estate, but they do not generally own or operate real estate.

Hybrid REITs: A hybrid REIT invests effectively in a combination of equity REIT, which own properties, and mortgage REIT, which invest in mortgage loans or mortgage-backed securities. By diversifying across both types of investments, hybrid REIT intend to get the benefits of both the worlds.  

Sectoral exposure

Retail: Retail REITs focus on malls, outlet centres, grocery-anchored shopping centres and power centres that feature big box retailers.

Healthcare: Healthcare REITs own and manage a variety of healthcare-related real estate and collect rent from tenants. Health care REITs include hospitals, medical office buildings and skilled nursing facilities.

Industrial: Industrial REITs focus on specific types of properties, such as warehouses and distribution centers (e-commerce).

Residential: Residential REITs include REITs that specialize in apartment buildings, student housing, manufactured homes and single-family homes.

Lodging: Lodging REITs own and manage hotels, resorts and rent space in those properties to guests. Lodging REITs own different classes of hotels based on features such as the hotel’s level of service and amenities. Lodging REITs properties service a wide spectrum of customers from business travellers to vacationers.

Self-storage: Self-storage REITs own and manage storage facilities and collect rent from customers. Self-storage REIT rent space to both individuals and businesses.

Data Centres: Data centre REITs offer a range of products and services to help keep servers and data safe, including providing uninterruptable power supplies, air-cooled chillers and physical security.

Land: In India, REITs cannot invest in land. But in mature markets, REITs can own raw land and develop it or sell it when they think there is appreciation on the price. Also, there are REITs which invest in land of farming.  

Chanchal Wankhade works with a large AMC. He has authored two books ‘Mutual Funds For All’ and ‘Health Insurance For All’. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.

 

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2 Comments
Kamal Garg · 1 week ago
Like in case mutual funds, the mutual fund schemes and/or the respective AMCs are the part owners (to the extent of their holding) of the issued share capital of the companies in which these Schemes invest, similarly whether the REITs, as they operate like a mutual fund, are also the owners of the underlying real estate assets or not. And if they are the owners of the underlying real estate assets, then, how the 'registry of the said office building' is done and at which office. And if not, then, 'who remains' the owner of the underlying real estate assets. Further would I invest only to get 'rent' from the underlying assets whereas what I am paying is the total cost of the underlying real estate asset.
I think the whole information is scatchy and superficial, at best.
Dr. Suraj Srinivasan · 1 week ago
As I understand, the SPV owns the real estate and gets the rental income. The AMC takes care of operations such as maintenance. For your point regarding the actual end investor ownership and rights, I am not sure how it works and yes, it will need more clarification. REIT seems to be an emerging product and may take time for these clarifications to happen.
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