Amid the still prevailing COVID-19 pandemic, when the office space segment has taken a beating, REITs have remained a sought-after investment avenue junction, providing a very healthy returns on their investment. We, at Multimedia Studio - examine the reasons for this outcome.
At a time when there are such lots of question marks ?? over office space portfolios following the Coronavirus pandemic, which has forced companies to go for the work-from-home (WFH) model, the success and investors’ appetite for property Investment Trusts (REITs) that operate primarily within the office space segment in India, settles many apprehensions. it's generally believed that the office space segment would be the last to recover, post the Coronavirus slowdown. Why are REITs such an enormous success then? the very fact is that for retail investors today, the exchange may be a preferred choice and therefore the safest among stock options are REITs, HNIs, pension funds, sovereign funds and institutional investors, are latching onto REITs, seeking yields, attentive to the very fact that the long-term growth of office spaces remains intact.
REITs in India: Quick facts
Mindspace REIT was oversubscribed 12.96 times during the foremost gloomy office space outlook, in June 2020.
The two listed REITs in India, Embassy and Mindspace, are trading at about 10%-20% premium to their listing prices, this is often over and above the periodic interest payments, yielding 6%-7.5%, post tax returns. REITs have also acted as a catalyst, within the changing financing structure of Indian developers. From unorganized funding structures, REITs are witness to structured finance, where global private equity players, mutual funds and insurance companies have shown interest, resulting in its success.
How do REITs work and what are its advantages?
Since REITs own, operate, or finance income-generating office space portfolios in India, they pool capital from investors and thus, make it possible to earn dividends from property investments, without having to shop for or manage the properties themselves. Admitting that the demand for office space will take a bit longer as WFH is here to remain for a few time, one believes that several commercial spaces are running empty since the COVID-19 lock down. People are waiting to work out how the scenario pans out. REIT is nevertheless an honest investment option, because its often traded within the exchange after its listing. In the long term, REIT may offer better post-tax yields, as compared to fixed income. This makes it a sexy investment option within the future, because of its steady and growing dividend stream, together with capital appreciation of the underlying asset. it's generally believed that estate sector will attract a bigger investor base in 2021 in future.
Although the worldwide crisis affect office REITs within the short to medium term, the long-term outlook still appears to be positive. Investors should consider taking a long-standing view on office REITs, there's visiting be more immediate pressure on operations and costs for companies but eventually, the impact on office REITs are momentary and manageable. The dividends distribution won't be the identical as before, because considering this challenges and costs within the near-term, it's possible that REITs may postpone portions of their distributions, to a later date. They will provide options for unit-holders, to partake during a distribution reinvestment plan, to preserve make the most the near term
Why REITs are a viable investment alternative?
Real estate and stock markets have emerged as preferred investment options for the Indians, post-COVID-19. Quality realty stocks were among the primary to witness green shoots, after the historic stock exchange crash in March 2020. REITs, with its higher dividend additionally to the stock price appreciation, is seen as a safer bet than realty stocks. Since its inception REITs have outperformed the BSE Realty Index in India. Since its listing on April 1, 2019, Embassy Office Park REIT has given 14% returns as against -20% by the BSE Realty Index (Data till June 25, 2020). REITs on bourses are trading at above 10%-plus premium to the initial listing price.
How REITs can help investors and also the land & plot sector
In a nutshell, a replacement product within the market with more safety around it, added with higher ROI, REIT has to this point been a hit story in India. Analysts believe that REITs have the potential to lend better security, thereby, organizing the real estate sector even more. Since REITs only own or capitalise on properties that are profitable, the concept are often an excellent boon to land investors. The trust will enable investors to induce capital appreciation and income from the property, without having to buy and maintain it. In its infancy in India, REITs have opened land to a broader spectrum of investors. REITs benefit the developers yet, because when REITs buy more properties, developers stand a stronger chance to sell more units. During unanticipated scenarios just like the current pandemic, the arena tends to induce impacted, thus, reducing the quantity of investments. In such a scenario, REITs can insulate the real estate market from risks, attracting more investments, irrespective of the economic conditions.
Last but not the least, REITs have encouraged foreign investment within the realty sector from NRIs, without them requiring to go to the property to take a position. As of now REITs are prevalent only within the commercial space. People are still getting acquainted with how REITs function and observing how it'll expand within the commercial space, lbecause the investor base increases, it's likely that the Indian market is also able to see REITs being introduced within the residential sector, as well.
The challenges ahead can lead to opportunities and each firm we researched seems to be making strong decisions to position themselves to meet and excel the future commercial real estate market ahead.
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