A REIT is a trust that owns a pool of income-generating real estate assets that are held as special purpose vehicles (SPVs). Regulations require that at least 80% of these assets must be completed and income-producing. Brookfield India Real Estate Trust (Brookfield REIT), Embassy Office Parks REIT (Embassy REIT), and Mindspace Business Parks REIT (Mindspace REIT) are the three listed REITs in India. Investors can buy units of a REIT either during its IPO or from the stock exchanges once it has been listed.
What Investors Get
As a unit holder, you receive a portion of the net distributable cash flow (NDCF) of a REIT, periodically. A REIT generates income in the form of interest and principal repayments on loans extended by it to the project SPVs and dividends in return for its equity stakes in these projects. All expenses at the REIT level are deducted from the total income to arrive at the NDCF.
While Sebi rules mandate REITs to distribute at least 90% of their NDCF to unitholders, there is no certainty on the quantum of the NDCF itself at least once in six months. All existing REITs make quarterly distributions. Going by the current market price and the latest nine-month distributions (April– December 2021), the three REITs have offered yields of 4–5.6%. Apart from this regular income, as REIT units trade on the exchanges like shares, they offer unitholders the possibility of capital gain or loss. REITs are, thus, a hybrid product that can offer high-risk investors attractive yields.
That a portion of the distribution made by REITs can be tax-free, only adds to their appeal. For example, 34%, 83%, and 93% of the distribution (largely dividends) made by Brookfield REIT, Embassy REIT, and Mindspace REIT, respectively, in the December 2021 quarter (Q3 FY22) was tax-free for unitholders. The interest income that you receive from a REIT gets taxed at your income tax slab rate.
According to Hemal Mehta, partner, Deloitte India, the dividend portion is tax-exempt as the project SPVs of the three REITs have been continuing with their existing tax regime and may not have opted for new concessional tax regime. The loan repayment portion, too, is tax-exempt as it is simply a return of capital.
Short-term capital gain on sale of REIT units is taxed at 15% and long-term capital gain (exceeding ₹1 lakh a year including those on equity investments) is taxed at 10%. In both cases, surcharge and cess apply. The capital gain is treated as short-term if the units have been held for up to 36 months and as long-term if held for more than 36 months.
What To Take Note Of
As a first step, investors can look at the NDCF – this is what is available for distribution to unitholders (at least 90% of it) – and whether a REIT is able to maintain or grow it consistently. Take, for example, Embassy REIT, which is India’s first publicly listed REIT and came out with an IPO in 2019. The REIT saw a small dip in its NDCF in the covid-hit FY21 compared to that in FY20. But, the NDCF for April– December 2021 (9M FY22) was up 20% from the same period last year, helped by lease rental escalations, asset acquisitions, and ramp-up in hospitality occupancy. The other two, Mindspace REIT and Brookfield REIT got listed only in August 2020 and February 2021, respectively. Their distribution history is limited.
It also helps to know whether a REIT has a geographically well-diversified asset base. For instance, Embassy REIT has 74% exposure to the IT and tech hub, Bangalore. Brookfield REIT, on the other hand, has office parks in Mumbai, Gurugram, Noida, and Kolkata, and Mindspace REIT has business parks and office assets across Mumbai, Hyderabad, and Pune.
Other metrics to watch out for in the quarterly investor presentations of REITs include property occupancy levels and the asset pipeline available for acquisition.
With people, especially from the IT industry returning to work-from-office, demand for office space leasing has picked up pace. This has improved business prospects for real estate investment trusts (REITs) that were adversely impacted in the post-covid work world.
Invest Or Not ?
REITs may appear to be a steady source of regular and largely tax-free income but they are far from risk-free. The post-covid period is a recent reminder. Though, subsequently, there has been a recovery in commercial real estate. This is likely reflected in the rise in REIT prices by 10-17% over the past six months. Mehta, who has been tracking the sector for 12 years, points out that it’s too early to say that the market has recovered. In case of a REIT which has some exposure to hotels too, one needs to watch out for how business travel picks up.
Notwithstanding the recent rise in their market prices, the current yields on REITs look attractive. However, given the market volatility and the still-evolving situation on the commercial real estate market, investors can play it safe by making staggered rather than lumpsum investments in REITs.
Anand Pandey (Bourse Academy)
As a unit holder, you receive a portion of the net distributable cash flow (NDCF) of a REIT, periodically. A REIT generates income in the form of interest and principal repayments on loans extended by it to the project SPVs and dividends in return for its equity stakes in these projects. All expenses at the REIT level are deducted from the total income to arrive at the NDCF.
While Sebi rules mandate REITs to distribute at least 90% of their NDCF to unitholders, there is no certainty on the quantum of the NDCF itself at least once in six months. All existing REITs make quarterly distributions. Going by the current market price and the latest nine-month distributions (April– December 2021), the three REITs have offered yields of 4–5.6%. Apart from this regular income, as REIT units trade on the exchanges like shares, they offer unitholders the possibility of capital gain or loss. REITs are, thus, a hybrid product that can offer high-risk investors attractive yields.
That a portion of the distribution made by REITs can be tax-free, only adds to their appeal. For example, 34%, 83%, and 93% of the distribution (largely dividends) made by Brookfield REIT, Embassy REIT, and Mindspace REIT, respectively, in the December 2021 quarter (Q3 FY22) was tax-free for unitholders. The interest income that you receive from a REIT gets taxed at your income tax slab rate.
According to Hemal Mehta, partner, Deloitte India, the dividend portion is tax-exempt as the project SPVs of the three REITs have been continuing with their existing tax regime and may not have opted for new concessional tax regime. The loan repayment portion, too, is tax-exempt as it is simply a return of capital.
Short-term capital gain on sale of REIT units is taxed at 15% and long-term capital gain (exceeding ₹1 lakh a year including those on equity investments) is taxed at 10%. In both cases, surcharge and cess apply. The capital gain is treated as short-term if the units have been held for up to 36 months and as long-term if held for more than 36 months.
What To Take Note Of
As a first step, investors can look at the NDCF – this is what is available for distribution to unitholders (at least 90% of it) – and whether a REIT is able to maintain or grow it consistently. Take, for example, Embassy REIT, which is India’s first publicly listed REIT and came out with an IPO in 2019. The REIT saw a small dip in its NDCF in the covid-hit FY21 compared to that in FY20. But, the NDCF for April– December 2021 (9M FY22) was up 20% from the same period last year, helped by lease rental escalations, asset acquisitions, and ramp-up in hospitality occupancy. The other two, Mindspace REIT and Brookfield REIT got listed only in August 2020 and February 2021, respectively. Their distribution history is limited.
It also helps to know whether a REIT has a geographically well-diversified asset base. For instance, Embassy REIT has 74% exposure to the IT and tech hub, Bangalore. Brookfield REIT, on the other hand, has office parks in Mumbai, Gurugram, Noida, and Kolkata, and Mindspace REIT has business parks and office assets across Mumbai, Hyderabad, and Pune.
Other metrics to watch out for in the quarterly investor presentations of REITs include property occupancy levels and the asset pipeline available for acquisition.
With people, especially from the IT industry returning to work-from-office, demand for office space leasing has picked up pace. This has improved business prospects for real estate investment trusts (REITs) that were adversely impacted in the post-covid work world.
Invest Or Not ?
REITs may appear to be a steady source of regular and largely tax-free income but they are far from risk-free. The post-covid period is a recent reminder. Though, subsequently, there has been a recovery in commercial real estate. This is likely reflected in the rise in REIT prices by 10-17% over the past six months. Mehta, who has been tracking the sector for 12 years, points out that it’s too early to say that the market has recovered. In case of a REIT which has some exposure to hotels too, one needs to watch out for how business travel picks up.
Notwithstanding the recent rise in their market prices, the current yields on REITs look attractive. However, given the market volatility and the still-evolving situation on the commercial real estate market, investors can play it safe by making staggered rather than lumpsum investments in REITs.
Anand Pandey (Bourse Academy)