By Rishit Jain
As Blackstone and Embassy are on their way to finalise the nations first REIT or Real Estate Investment Trust, one needs to understand exactly what this trust does, and why it could be a game-changer in the industry. Announcing the commencement of the REIT in September, with a portfolio of 2.1 million square meters of business parks and 10 million square feet of space for a pipeline of potential and upcoming projects, Blackstone and Embassy are eyeing a $1 billion listing.
Blackstone owns 43% of the project while Embassy owns 23%, and this will be the first REIT listing in Indian financial history. The aforementioned firms have said they are expecting a consistent 7.5-8% return on their investments.
What is a REIT?
A REIT is a firm that operates or finances income-producing real estate. As REITs trade on major exchanges like other securities, they also provide a liquid stake in real estate. Much like a mutual fund, investors of all sizes pool their money through investments to the REIT, allowing them to collectively purchase real estate they may have been unable to individually. REITs can earn income in a variety of ways, such as by leasing space, collecting rent payments and providing dividends from the same to its investors and are also called equity REIT.
There can also be mortgage REITs whereby one also buy property mortgages from lenders, essentially earning the right to the debt associated with the underlying property, earning money off of the interest from the money lent.
History of a REIT
REITs have been around since the 1960s when the Congress through Public Law 86-779 initiated this instrument clearly stating its capacities and limitations. It is seen globally as a common, publicly traded investment instrument.
Today, we see decade-old titans in the realty trust markets in the USA, such as Digital Realty Trust which launched an IPO at $12 in 2004, trading at $124.28 today (a compounded 18.21% return annually over 14 years). Another titan in the realty trust market, Simon Property Group has jumped from $30 in mid-2009 trades at $183.03 (compounded 22.26% return annually over 9 years). Despite being realty investments, trusts such as these have proven the capacity of REITs in providing consistent and high returns. This excludes dividends and other forms of earnings for investors beyond speculative gain.
Maintenance of Expectations
While such glossy figures of consistent returns may peak investors interest, there are certain things to be wary of. An example of a similar instrument that failed to live up to expectations was InvITs or Infrastructure Investment Trusts, intended to finance and earn off of infrastructural projects. One reason for this disappointment is that investors have quantified its performance solely through falling share prices, with IndiaGrids fall of 4% in valuation since June 2017, and IRB InvITs 15% drop. Yet, InvIT investors earn from not just share prices, but also dividends, buybacks, interests, and several other streams, making this a poor form of quantification of success when used independently.
Furthermore, such trusts are often misunderstood as being competition for equity investments, which are far more capable of earning higher returns due to a far higher risk. REITs amalgamate the lower speculative risk of realty, with the higher liquidity of an equity investment and not the other way around. REITs are not another equity instrument, they are a realty instrument.
REITs, the Saviour
When it comes to the housing market in India, constant hurdles such as demonetisation and the implementation of the Goods and Services Tax (GST) have riddled the housing market with failure. In the year of demonetisation, home sales dropped in the last quarter in Mumbai, New Delhi and Bangalore by 40%, and property launches crashed by another 45%. The industry had reportedly generated losses worth Rs 226 billion. In 2017, real estate prices continued to dip 3% across cities, with Pune witnessing a 7% decline. This has been attributed to falling demand, as Bangalore witnessed a continued 26% fall in sales.
The NPA crisis further harms the market, as new launches require freshly available credit, which financial institutions are cutting down on in an attempt to clean up balance sheets. Furthermore, market entrants are also harmed as a lack of credibility further decreases their odds of obtaining any form of well-priced credit.
At the same time, the Indian economy continues to grow at record rates of 8.2% in the first quarter of 2018. This is where REITs act as a saviour for the realty market. They create a system that removes the risk of liquidity. With a publicly traded instrument that divides a large sum of money into thousands of tiny slices, investors are far more capable of and would feel far more comfortable delving themselves in such an investment. At a time of rising growth and incomes, the introduction of such a consistent and stable investment could be immensely successful.
Rishit Jain is a writing analyst at Qrius