Best Way To Invest In REITs? The Best Real Estate Investment Trust in India (REIT)

List of Real Estate Investment Trust In India To Invest 2022 | List of Real Estate Stocks

Almost immediately after the pandemic, new lows in real property prices started to appear. Real estate investment trusts (REITs) are finally making their debut in India. India saw its first REIT in 2019, and there are now three Mindspace REIT and Brookfield REIT Embassy REIT.

REITs are a type of security that owns or operates income-producing real estate it is like mutual funds. In India, they are listed on the stock exchanges and are open to both institutional and retail investors.

The key attraction of REITs is that they provide a way to invest in portfolio of real estate assets class without having to buy it outright. They are also relatively low-risk investments, as they are required by law to distribute at least 90% of their taxable income to shareholders. This helps to ensure a regular income stream for investors through commercial real estate.

The Securities and Exchange Board of India (SEBI) requires real estate investment trusts (REITs) to distribute at least 90% of their distributable cash flows to unit holders. In order to decrease execution risk, at least 80% of a REIT's assets must be completed and generating income. The sponsor is obligated to hold a certain number of units of the REIT, with the remaining units being issued to investors through an initial public offering (IPO). Once listed, REITs serve as a permanent vehicle for raising debt and equity in the capital markets in order to acquire new assets and grow.

Which is the best REIT in India?

Each of the three trusts have sound management and financial stability. They offer investors comparable growth potential in the long run.

However, some REITs exhibit better performance than others in few parameters.

Embassy REIT has the highest dividend yield & highest occupancy rate.

Mindspace REIT offers the highest tax-free distribution (90%) compared to others. Their LTV is the lowest (15.7%) among others.

Brookfield & Embassy are more focused on NCR (67% of GAV) & Bangalore (74% of GAV), while Mindspace is more diversified across 4 major cities.

Asset quality is better for Embassy & Mindspace compared to Brookfield.

Tell me the best way to invest in REITs? Read More

There are a few things to think about when you are looking at REITs. Here is more information on each factor.

Weighted Average Lease Expiry

A weighted average lease expiry is a calculation used to determine the average lease length, WALE is used to calculate the time until a property will be vacant. It is measured in years. The higher the number, the better.

Distribution Yield

A distribution yield is the percentage of a company's earnings that are paid out to shareholders in the form of dividends. This metric is important to REIT investors because it indicates how much cash flow is being returned to shareholders each year. By law REITs have to pay 90% of distributable cash flows to the investors.

Loan To Value

The Loan to Value (LTV) ratio measures how much debt was borrowed in relation to the value of the underlying assets. The general rule is that the lower the leverage, the better. Excessive debt relative to assets can lead to financial ruin.

Net Distribution Cas Flow

Net distributable cash flow, or DCF, is a term used in real estate sector, or REITs. It is a measure of the cash available to pay out to shareholders. This is calculated by taking net income and subtracting non-cash charges, such as depreciation and amortization. The result is then divided by the weighted average number of shares outstanding. This gives investors an idea of how much money the company has available to pay out in dividends.

High occupancy

High occupancy is key to a successful real estate investment portfolio. When a property is fully leased, it provides stability and consistent cash flow that is essential to a well-diversified REIT (real estate investment trust) or other real estate portfolio. This is why high occupancy has been and will continue to be one of the most important metrics for assessing a property’s value.

Diversified portfolio

Whenever there is an oversupply of properties in a certain area, it will lead to a reduction in occupancy rates and rental income. However, if a property is well-managed and located in a prime spot, it is more likely to have a higher occupancy rate. Real estate investment trusts (REITs) that have a diversified portfolio across different geographical areas and tenants are less likely to experience oversupply and concentration risk.

Net Asset Value

Net asset value (NAV) is a term used in the investment world to denote the market value of a company's assets minus its liabilities. The calculation is performed by dividing a company's total assets by the number of shares outstanding.?

For real estate investment trusts (REITs), net asset value is often used as a measure of performance, as it takes into account both the income generated by the trust's properties and its debt levels. A higher NAV indicates that the trust is doing well and is generating more income from its properties than it owes in debt. Conversely, a lower NAV would suggest that the trust is struggling and may be in danger of defaulting on its obligations.?

REITs sometimes trade for more or less than their NAV. This is due to the demand and supply of traded units. In these cases, it is important to monitor the share price in relation to the NAV.

Taxation

The cash that is given to the unit holders comes from a combination of three things- interest income, dividend income, and the repayment of debt. The taxation for REITs works the same way for everyone, except for the dividend income. That part depends on what tax regime the SPVs had chosen. Unit holders get taxed at the same rate that REITs are taxed. The REITs that have the highest non taxable portion of NDCF are more likely to be more interesting to investors.

Overview of Indian Real Estate Investment Trust In India (REITs)

Like shares, you may purchase units of REITs on NSE and BSE, the dominant exchanges.

REITs are offered to the public through an Initial Public Offering (IPO) and follow on public offer (FPOs), just like equity stocks. Therefore, you must have a Demat Account. Once the initial offer is closed and the allotment is complete, REITs can be traded on the stock exchange.

As of July 30th, 2021, the minimum investment amount for a REIT investment is now between INR 10,000 to INR 15,000. Prior to this date, the minimum investment amount was set at INR 50,000. The minimum lot size for REITs has also been reduced from 100 units to 1 unit in the same SEBI notification.

Types of Real Estate Investment Trusts (REIT)

6 kinds of REITs exist in India according to the sort of business they focus on, whether they're private or government owned, and whether they have private or public land. Following are the types of REITs in India.

1. Equity REITs: These are properties that generate all the income made. The host makes all the income through a lease. This is the most common type of REIT. The income will be distributed among the investors.
2. Mortgage REITs:?REITs that invest in real estate, aka mREITs, partner up with real estate developers to finance the building of projects. This arrangement does not earn rental income for the REITs, but interest that is paid out to the investors. REITs also buy real estate properties and collect rental income that is shared with all the investors.
3. Hybrid REITs:?They have both owned and residually based properties and either obtain or reset revenue from normal rental yields or interest payments. This allows investors to increase their portfolios and earn income from these sources.
4. Private REITs:?These investments are privately handled and are not offered to any stock exchange.
5. Publicly Traded REITs: It is listed on the stock exchange (NSE) and registered with the SEBI. Investors can buy and sell shares of it through the stock exchange. They are more liquid but are subject to market volatility.
6. Public but not listed REITs: This investment trust is registered with the Securities and Exchange Board of India but is not on the exchange. Thus, they are less liquid than a publicly-traded investment but considerably more secure than they are speculative.

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?Disclaimer: This article is for information only and should not be considered as recommendation to buy or sell any stocks