REIT is an acronym for Real Estate Investment Trust. REIT is basically a company which develops and own ‘income producing’ real estate properties. IPO of India’s first REIT was launched on 18-Mar’19. Shares of Indian REIT started trading from 01st April’19 in Bombay Stock Exchange.
In the 3Q ending 31-Dec’2019, Embassy REIT has posted a 9 month income of Rs.16,603 Crores. The net profit (PAT) for the 9 month period was Rs.7,077 Crores. This way its Basic Earning Per Share (EPS) comes out to be Rs.9.17 per share. Check the 3rd quarter report here…
For REIT’s there is a mandate that out of all Net Profit (PAT), at least 90% should be paid out as dividends to its shareholders. It means, not more than 10% of PAT can be kept as retained earnings by REIT’s in India.
So we have three numbers of significance here. Current Share price of Rs.348. Potential dividend payout is Rs.8.25 per share (90% of EPS Rs.9.17 – only 3Q considered for calculation).
This way minimum expected dividend yield, at current price levels of Rs.348 will be 2.37%. In current market scenario (19-Mar’2020), where share price are falling rapidly, the yield may improve further in next 1-2 months. Read more on real estate investment here…
Embassy REIT Share Price
|Share Price (Rs.)||A||348|
|– 52W High (Rs.)||A.1||518|
|– 52W Low (Rs.)||A.2||300|
|Book Value (Rs.)||B||299.88|
|Face Value (Rs.)||C||300|
|Nos. of Shares Issued (Cr.)||E||76.35|
|Market Cap (Rs.Cr.)||D = E*A||26,569|
|P/B Ratio||F = A/B||1.160|
|Min. Buy Qty (nos)||G||200|
|Min. Investment (Rs. Lakhs)||H = A*G||69,600|
Table updated as on 19-Mar’20. Read more about EMBASSY REIT here…
How REITs work?
Real estate sector needed a push in India. In cities like Mumbai, Bangalore, Delhi NCR, Pune, Chennai, Hyderabad, real estate work is good. But who is benefiting from this growth? At least not the common man. Why?
Because quality properties are expensive and are beyond the reach of majority population. Common men can get their hands on only below-average properties. It is only the rich who are benefited.
What government has done to include common men in the real estate’s growth story?
- In 2016 budget, they passed the real estate regulators bill. Now there is a “regulator” who will take care of the concerns of all real estate investors.
- In 2019 March, IPO of India’s first REIT was launched.
Why to invest in REIT?
One of friend asked this interesting question about REIT. Why to buy REIT shares and not directly buy commercial properties? Because of the following Reasons:
- Less Capital Intensive: Direct investment in real estate property is very capital intensive. But each shares of REITs will be comparatively more affordable (it will not require large capital outflows).
- Suitable for small Investors: Moreover, buying property directly exposes common men to the POWERFUL BUILDERS. Investing through REITs will eliminate dealing with builders altogether.
- Transparency: REITs stocks are listed in stock market. Hence all relevant details will all be available online for its investors.
- Assured Dividends: REITs generates income in form of dividend. REITs dividend payment is relatively assured. Why? Because most of their income is in the form of rental (lease) income.
- Tax Free: Dividend earned by the investors of REIT will be tax free.
- Fast Capital Appreciation: As Embassy REIT is first of its kind in India, its capital appreciation in next 5/7 years can be phenomenal.
- Easy to buy: REITS will also easy the whole process of investing in Real Estate Properties, how?
Imagine yourself buying a property for investing purpose? What steps one has to take while investing?
- Identify a good property,
- book a property,
- make self-contribution,
- arrange for balance funds (if loan is required),
- prepare a sale deed,
- registration of sale deed,
- taking of handover from present owner/builder,
- maintenance of property etc.
But buying REITs (instead of directly a property) will eliminate all these steps. REIT is also regulated by a regulator which will further eliminate the chances of any bungling commonly done by substandard-builders.
Again, properties developed by quality builders are expensive and are generally out of reach of common men. But REITs will clear this hurdle.
Investment in real estate market through REITs will give the accessibility to common, to invest in properties developed by the quality builders.
Example: Has EMBASSY REIT not introduced in India, how many of us could have purchased an office space of such high quality? I hope you are getting my point.
How REIT’s investors make money?
REITs are similar to mutual funds and shares. How REITs provide income to its investors?
- Dividend: REITs pay dividends to its shareholders.
- Capital Appreciation: As REIT stocks are listed in BSE and NSE, price appreciation of its shares will also make money.
How REITs make money for themselves?
REITs can earns revenue in two ways, depending on the type of REIT we are dealing with. Broadly speaking, there can be two types of REITs in operation:
- Equity REITs: they own large real estate properties like shopping malls, office spaces, massive residential townships etc. Equity REITs make money by giving these properties on rents or long term lease. The earned income is then distributed among the REITs investors as dividends.
- Mortgage REITs: they are not the owner of properties. They have only finances the debt for those real estate projects. Means, they get the EMI’s against those properties (from the developer/builder/owners). These earned income in form of EMI’s are then distributed among the REITs investors as dividends.
How REIT makes it win-win…
REIT is good for both builders and investors in India. Moreover, if things go as planned, REIT is going to be the next big thing for the investment world. Why? Because it has capability to create a win-win situation for all. How? Let’s see…
- Builders Perspective: BuildBuilders can approach REITs for their working capital requirement. REITs can prove as an alternative to bank loans for builders. REITs will also work as a financier for big real estate projects.
- Investors perspective: Indian investors can buy shares of REIT to generate stable income for themselves. Instead of buying a whole physical property, people would prefer buying shares of REIT. Even in terms of portfolio diversification, REIT will be a great alternative.
- Market’s Perspective: REIT launch will benefit the whole financial market of India in long term. REIT launch has given rise to a brand new investment vehicle for the investors. This will not only benefit existing investors, but may also bring new investors in the market. This way, the whole “investment activity” in the country will see a growth.
Expected Returns from REIT India
On an average, returns of real estate investment in India can yield returns close to 8%+ p.a. But this I am talking about average residential properties.
When it comes to premium commercial properties (like office spaces of Embassy, or shopping malls etc), the return yield could be better (like 10-12%+ p.a.).