Infra Talk: Indian retail investors keen to cash in on REITs

The formation of Real Estate Investment Trusts (REITs) will help in expansion of the quality real estate universe in India, besides giving developers another instrument to exit their projects. REITs would own real estate, and most of them are expected to have their shares listed on the stock market. These listings will provide retail investors a good and an entirely new opportunity to participate in real estate’s growth story in India. 

However, would an industry that has not been able to exploit its full investment potential so far be able to attract droves of retail investors? With REITs, the answer is yes. This instrument has the potential to attract institutional and retail investors alike because of its inherent nature to provide regular dividends at relatively low-risk levels. 

And why is that? One, because REITs in India will prefer to invest in commercial developments — specifically in the highest quality or Grade A properties — due to the higher rental yields in this asset class. Two, because only 20 per cent of an Indian REIT’s monies can be invested in development, which is the riskiest end of the real estate industry. The remaining 80 per cent of the fund’s assets must be invested in income-producing property.

Since such projects are often office buildings or shopping malls, they have already been developed and have tenants, so their income stream is relatively easy to predict. As the value of these projects increases, REITs will hold them for a long term and not trade in and out of real estate. As for the yields, the rental yield in commercial asset class across the country is usually in the range of 8-11 per cent. 

If the capital value appreciation for residential property is not taken into account and only the rental yields of both residential and commercial asset classes are compared, yields in the former stand much lower at 2-4 per cent. In commercial developments, yields combined with capital value appreciation over the recent years have been better off than residential properties. 

REITs in India, like many others around the world, will be required to pay out 90 per cent of their income from stable assets to investors.