Why Investors in India are Pivoting to REITs

By Ankit Aggarwal, MD, Devika Group

Investment, income generation, and wealth creation are the cornerstone of living a purpose-driven and meaningful life. Traditionally there have been two sources of investment and income generation- real estate and the stock market.

In India alongside other Asian economies, real estate is one of the major drivers of wealth creation and passive income. Real estate is a tangible asset and it is perceived as a low-risk investment option. By investing in real estate one can earn through capital appreciation as well make recurrent rental income.

In the stock market, one can invest in the equities of publicly traded enterprises. Equity investment renders capital gains as well as reaps dividend income. If invested smartly, stocks can give generous returns. However, they are riskier assets and are subject to market, economic, and political risks.

Meanwhile, recent years have seen another prominent category making a mark on the global investment landscape. There is a growing spotlight on REITs that blend the prowess of real estate and financial markets. REITs give the opportunity to own top-quality income-generating commercial real estate assets and make smarter returns.

It should be noted that, out of numerous types of real estate, commercial real estate is believed to be the most lucrative category. Owning a piece of Category A property in a Central Business District (CBD) can give returns to the tune of 7-9% annually. Nevertheless, the large ticket size of the investment debars the average investor to play out in the space. Not everyone can own a commercial asset in a prime location, as they are very expensive.

REITs on other hand, are a great instrument that can dismantle the asymmetry and make it a level playing field. Just like the stock market, REITs are traded funds that invest in income-generating commercial real estate assets.

Even with a modest INR 300-350, one can buy a single REIT and get active in the real estate business. REITs offer elevated yields and one can make income through dividend as well as capital gains. The rental yield in REIT is mostly in the range of 5-7%, while the overall income ranges annually from 12-20%.

REIT is a great way to diversify portfolio by getting exposure to commercial real estate. It can also be instrumental in hedging against inflation. Another benefit of REIT is that they are very professionally managed and are structured along the lines of the mutual fund. There is a sponsor (that promotes the fund) and a manager (to manage the investment). Besides, there is a trustee to ensure the proper utilization of the fund. This mitigates the risk and further makes REIT the go-to asset to gain elevated yields in a  risk-free manner.

It was introduced in India in 2019, with the Embassy Park REIT. Since then the investments in REITs is on an upswing. Globally REITs invest in a handful of assets such as offices, malls, and warehouses, etc. However, in India, the scope is mostly limited to office assets. REITs are stipulated to distribute 90% of their rental and interest income to the investors.

In USA, REITs is amongst the most popular source of investments and over USD 3.5 trillion worth of real estate is managed by them. This underlines their growing scope as an alternate investment asset. Due to its inherent benefits, the Indian REIT market will also  witness similar growth-centric patterns in the coming years.