Mutual Funds step up investments in REIT:
A real Estate Investment Trust (REIT) is a company that owns and operates income producing real estate. They are also known as real estate stocks.
It is a pool of real estate investments assets that can generate regular income and is held like a mutual fund. Mutual funds collect money from investors and invest them in the stock market, the REIT collects money from retail and institutional investors and deploy them in real estate assets like shopping malls and offices. These estates yield regular rental or lease income. REITs are gaining popularity in India lately. More confidence is generated in India’s commercial real estate segment. Mutual Funds have provisions that allow them to invest their funds in REITs.
Advantages of investing in REITs by mutual funds:
Though there was a fear that commercial real estate might struggle due to the Covid-19 borne work from home and other factors, the MFs are steadily diverting their funds towards REITs expecting the normalcy to regain. REITs majorly include a portfolio of commercial real assets which are already leased out. NRIs are also interested to buy property in India.
SEBI regulations issued the guidelines for REITs in 2014 and revised them in 2016 and 2017. They provide for a minimum of 90 percent distribution of cash flows by the REITs to their unit holders. REITs are transacted through the secondary market. There are stringent reporting and disclosure practices to be adhered to by the REITs.
Debt and hybrid mutual funds find them attractive due to this regular pay out feature. Rental yields, low interest rates and liquidity flow backed up by listing framework are few main reasons to make them lucrative.
REITs are designed to be tax efficient. The government has given them pass through status. Such pass-through flows including rental income and its distribution will not be taxed. Due to long term lease security, income is guaranteed for a longer period.
Mutual funds bring in professional management into equities and debt, REITs bring in professional management into real estate pool. From an investor point of view REITs create a demand and supply since they are traded in the form of securities. Investors will worry less about entry and exit costs. It offers an opportunity to buy real estate as a financial security. It is less cumbersome and much cheaper to transact in REITs than in property. This segment has introduced a new asset class to investors outside of traditional equity, debt, cash and gold diversifying the risk.
Brookfield India joined the REIT club recently. Embassy office Parks REIT and Mindspace REIT were the only two listed real estate investment trusts so far. In 2020 the REIT got a funding of Rs.3972 crore as compared to Rs.670 crore in 2019. The yields are in the range of 7.5 to 8 percent.
When Mutual Funds invest in such instruments, investors are bound to check the weightage to these are not excessive in the overall portfolio. The promoter background and debt raising against the REIT units should be checked.
REITs face a major growth challenge. They distribute their earning to the holders. And thereby living with them with a small amount of money to plough back into the business and grow. Relying on debt has created a major financial risk for them. Investors need to think about the losses that might arise due to such reasons.
From the tax front there is no certainty about the pass-through status. Real estate is not a regulated sector and no national policy exits for the same. The rental yields too are not attractive in India.