Alternative to Real Estate Investment.

What can be an alternative investment to real estate?

In my previous write up,I had explained the problems of real estate as an investment in India.In this write up,I will try and explain a better alternative to investing in Real estate directly.

Real Estate Investment Trust (REIT) is a tax-efficient vehicle that owns a portfolio of income-generating real estate assets. A REIT is created by a sponsor, who transfers ownership of assets to the trust in exchange for its units.

Think of it like a mutual fund, where money is pooled from investors. In return they were offered mutual fund units. Instead of shares of public companies, REIT units represent ownership of real estate assets.

Profits are generated in the form of dividends & capital appreciation.

Positives of REIT

-SEBI regulations require REITs to payout 90% of distributable cash flows to unit-holders.

-REITs must have at least 80% of their assets to be completed & income generating. This decreases the execution risk.

-The sponsor is obligated to hold certain units of the REIT & remaining are issued to investors in the form of an IPO.

-Once listed, they serve as permanent vehicle to raise debt and equity in the capital markets to acquire new assets & grow.

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What should you look for in REIT?

Weighted Average Lease Expiry

Te biggest risk of running a commercial property is vacancy. WALE is used to calculate the time left for property to go vacant. It is measured in years. The higher the better.

Distribution Yield

By law REITs have to pay 90% of distributable cash flows to the investors. Distribution yield is a metric to measure these payments. However this is not a guaranteed payout. It depends on the trust performance. Again the higher the better.

Loan To Value

Loan to Value (LTV) measures how much debt was borrowed compared to the underlying asset value. Just like any other business, the low leverage the better.

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High occupancy

The occupancy rate is the percentage of the square foot available in the portfolio of REIT. This is an important metric of its performance. This ensures consistency in payouts, increasing rental & dividend income. The higher the occupancy, the stable are the cash flows. Having said that, it is unlikely to have 100% occupancy always.

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Diversified portfolio

A well managed property in prime location will have the highest occupancy rate.?On the other side, oversupply of properties can reduce occupancy rates & rental income. REITs having diversified portfolio across geographies & tenants?are less prone to oversupply & concentration risk.

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Net Asset Value

NAV?is one of the best way to assess REITs. Think of it like a Book value per share. It is calculated as the estimated market value of the properties minus all liabilities. This divided by number of shares outstanding. NAV is more accurate way to determine share price of REIT.

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?Taxation

The cash distributed to the unit holders is a combination of three parameters – Interest income, Dividend income & Repayment of debt.?Taxation works the same for all REITs except for Dividend income. It depends on the tax regime the SPVs had opted for.

Unit holders are taxed at the same rate at which REITs are taxed. REITs having the highest non taxable portion of NDCF are likely to gain higher interest among investors.

In the next post-We will try and analyse the REITs present in India and How we can invest in them.