Shares of real estate investment trust (rits) has delivered decent returns in the last two years since its listing, but experts feel that this asset class still offers investors a good buying opportunity. This belief stems from recent reports of strong recruitment in the tech industry, and an expected pick-up in demand for office space leasing in India as more employees return to offices.
a Rito A trust that owns a pool of income-generating real estate assets held in the form of special purpose vehicles (SPVs). There are three listed REITs in India – Brookfield India Real Estate Trust (Brookfield REIT), Embassy Office Parks REIT (Embassy REIT), and Mindspace Business Park REIT (Mindspace REIT).
Even though experts are in favor of investing in REITs, investors need to consider these factors before making an investment decision.
delivery yield
As per the guidelines of market regulator SEBI, REITs in India must distribute at least 90% of the available cash to the unitholders. Thus, distribution income — which comes in the form of dividends, interest, or loan repayment to unitholders — makes up a significant portion of the return from REITs. Examining REITs’ current distribution yield gives a fair picture of the returns that can be expected from their investments. It is calculated by dividing the distributed earnings per year by the current market value. Thus, REITs in India currently provides yields in the range of 5.3-6.8%.
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Experts say that the real returns in the hands of investors may increase in the coming years. “If future lease renewals happen at a rate higher than the current rate, the cash flow will automatically increase, resulting in higher return on investment,” said Vishal Chandramani, Chief Operating Officer, TrustPlutus. This is the reason why REITs are considered a good asset class in an inflationary environment as many agreements with tenants have an escalation clause to cover the increase in cost.”
Note that the opposite is also true. Distribution yield is not a guaranteed return at the time of investment which can be expected from REITs.
Another important component of returns is the capital appreciation of the investment value. While many factors determine the price at which a REIT trades in the stock market, a simple step to ensure that you are not overpaying is to check the net asset value (NAV) per unit. , which is reported by the company every quarter.
tax structure
Each return component from REIT is taxed separately (see table). A higher component of interest in the distribution of income would be tax-incompetent for individuals in higher tax brackets. Note that companies also provide a break-up of income distributions and guidance on the expected tax structure of future earnings. Sahil Kapoor, Senior Executive Vice President, IIFL Wealth, said, “Usually every quarter, the management of REITs gives guidance on what the tax structure will be next.
portfolio matters
The health of the REITs portfolio can be assessed using certain metrics as disclosed by the Company from time to time. First is the geographic location of the asset – the more diversified it is, the lower the concentration risk for the portfolio. Similarly, a mix of tenants from different sectors mitigates industry exposure.
The Occupancy Ratio and Weighted Average Lease Expiry (WALE) give an understanding of the cash flow generation potential of Rite’s portfolio. Occupancy ratio indicates the ratio of rented units to the total available units in a building. “The occupancy rate of 85-90% is a good number,” said Srinivasa Rao Ravuri, chief investment officer, PGIM India Mutual Fund.
Investors should also follow management’s comments on REIT expansion plans. REITs also take advantage of investing in new properties. Divyesh Shah, Director, Crisil Ratings said, “Debt to Gross Asset Value”, which reflects the ratio of debt-financed assets, is a good metric to gauge the leverage position of REITs.