Indians’ love for real estate is inseparable. However, it is not for everyone to take on such a high investment cost. Real Estate Investment Trust REITs are a relatively new type of investment scheme (in India) that offer real estate investments at a low cost. The REITs own and manage real estates that generate income on a regular basis. REITs are good schemes for diversifying the investment portfolio and generating regular income. REITs are a low-cost alternative to traditional real estate investing, therefore making it attractive to most investors. This article covers how to invest in REITs and things to remember before investing in REITs.
How to Invest in REITs?
Similar to equity stocks, the launch of REITs also happen through an Initial Public Offering (IPO) and follow-on offers (FPOs). Therefore, it is mandatory to have a Demat Account. REITs trade on the stock exchange after the close initial offer and allotment.
Prior to July 30th, 2021, the minimum investment amount for a REIT investment was INR 50,000. However, post-SEBI’s notification on July 30th, 2021, the minimum investment amount is between INR 10,000 to INR 15,000.
The minimum lot size for REITs has also been reduced from 100 units to 1 unit in the same SEBI notification.
Things To Remember While Investing in REITs
As an investor, you should consider the following parameters before choosing a REIT for your investment portfolio:
Occupancy Ratio of REIT
For the REIT, check the occupancy ratio, which is the ratio of occupied or rented space to the total available space.
It is essential to look at the portfolio holding of the REIT. Understanding the clientele is important. Companies across different sectors occupy spaces in REITs. Therefore, it is essential to analyse the tenant’s profiles as well. Non-payment or irregular rent payments can have an impact on the REIT. Furthermore, currently, there is no regulation by SEBI on the regularity of cash flows from leased or rented properties.
Assets focussed across one city can be dangerous. State-specific regulations control real estate movements, and these vary from state to state. The asset portfolio should be well-diversified across different regions to protect the REITs interest.
Historically seen, the IT sector has been the prime occupier of premium and high-quality office spaces. Over-dependence on one sector can be risky. As seen recently, working from home can be the new normal. Vacant spaces or non-payments will affect the REITs performance. Therefore, while choosing a REIT, ensure that the asset portfolio is well-diversified across different sectors such as Banking, FMCG, Healthcare, Pharma, etc.
Rolling renewals and Re-leasing spread
Usually, the leasing commitment period is around five years. The rolling renewals indicate the number of tenants who are exercising their renewal options at the end of the lease period. A good number of rolling renewals will indicate stable returns.
Re-leasing spread is the change in the per square feet (PSF) rate between the new and expiring leases. It is expressed as a percentage that signifies the REITs ability to execute the new leases at the increased prices for the same property.
Various other factors such as consistency in the income (rental) flow, brand name, interest rates, economic changes, the experience of the sponsor and manager, etc., can have an impact on the performance of the REITs.