Reits now within easy reach, but learn more before you take the plunge

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With the minimum lot size reduced, should you consider investing in Reits? Reits are a good way of taking exposure to real estate, but it is important that you understand how they work before you invest in them.

Let’s understand what the new change would mean for you.

The change: Reits are products like mutual funds through which investors can own income-generating properties, such as commercial buildings and office spaces, which they otherwise can’t afford to invest in. Just like mutual funds, if you invest in the initial public offering (IPO) of a Reit, you will be allotted units. Before the change, the minimum lot size of a Reit was 200 units. It meant you needed a minimum investment of 50,000-60,000 to purchase a lot, if, say, the price of a Reit was about 300 per unit. However, now—although there is limited clarity on the minimum investment required as finalized guidelines are awaited—experts say the minimum investment requirement is likely to apply for buying units in the IPO, but one will be able to buy and sell a single unit of Reit on stock exchanges just like a share.

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“We understand that the minimum application amount of 15,000 for Reit units is in the case of an IPO. But since the trading lot has been reduced to one unit, investors will be able to buy and sell a single unit of a Reit in the secondary market,” said Michael Holland, chief executive, Embassy Reit.

The new regulation will help increase the investor base and improve the trading volume of Reits.

“The change facilitates access to Reits by a much broader investor base. We started with 4,000 investors, and today we have around 12,000 investors. The three-month average daily trading value (ADTV) of Embassy Reit is about $4.4 million (about 33 crore), while that of one of the big listed real estate developers is around $35 million. The developer has a higher trading volume in part because of the single share trading lot size, which in turn leads to a higher number of shareholders and more liquidity. It’s a virtuous circle,” said Holland.

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Higher trading volume means better liquidity, which, in turn, means investors can enter and exit easily. “The reduction in lot size will benefit investors and the entire Reit industry. It is a welcome move and shows the increased trust placed on industry participants. The previous limit of 50,000 was high for small investors. The decrease in minimum size will bring these investors to the market and lead to increased retail participation, improved liquidity and efficient price discovery,” said Amit Bhagat, chief executive officer and managing director, ASK Property Investment Advisors.

Also, reducing the lot size to one unit brings Reits at par with equity.

“With this, it also opens access to various indices like any other stock, which would further enhance liquidity,” added Holland.

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If a stock is part of an index, it helps in further improving the liquidity as the trading volume goes up.

Investing in Reits: Reits are a good product for someone looking for exposure in commercial real estate and is willing to remain invested for long. By investing in Reits, the investor can get some predictable returns in terms of dividend and also benefit from the appreciation of share price.

Sebi regulations require Reits to invest 80% of their assets in developed and income-generating assets. Currently, Reits are allowed to invest only in commercial real estate and office spaces. They need to distribute 90% of the rental income as dividends. Reits also receive interest income from special purpose vehicles (SPVs) through which they hold properties. They lend money to SPVs and distribute the interest income among unitholders.

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The returns from Reits can increase with the rise in rents and leasing of vacant space, and the addition of new properties to the portfolio through new development or leasing of under-construction projects, among other things.

The earnings of a Reit may be impacted by a slowdown in new leasing and renewal of leasing contracts. Oversupply of commercial space in a location can affect the rate at which the rent rises. There are concerns about the ongoing pandemic impacting the demand for commercial real estate, but experts feel the impact will be in the short term; in the long run, Reits could do better.

“Investors should look at Reits for long-term stable income with potential for capital gains. They should invest a percentage of their income in the segment based on their risk appetite and current exposure to the real estate sector,” said Bhagat.

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Reits should be used as an asset that can help in delivering better than fixed income return over the long term.

However, rather than concentrating on one Reit, it will be better if an investor spreads his/her investment in the segment over two-three Reits.

Currently, there are three Reits listed in India.

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