Embassy Office Parks REIT’s IPO marks the beginning of a new investment vehicle for Indian investors. Till date, real estate is the most accumulated asset class by the Indians but, investing in real estate is not that simple. The investment of a huge chunk of money, lack of diversification, title verification, and costly commercial real estate are few of the many hurdles that come in the way while investing in this sector.
REIT or Real Estate Investment Trust structure is almost like a mutual fund one which can be a boon for an investor who is looking for a stable rental income majorly from commercial real estate. Globally, gross returns from REIT have been in the range of 8-14 percent and enjoy some decent share of retail investors money.
Returns in REIT’s are generated through Rental Income(distributed as a dividend), interest earned and capital appreciation of property. Those investors who are looking for regular income can very well invest in this vehicle. Obviously, the risk in REIT’s is on the higher side as compared to fixed deposits because of the cyclical nature of real estate sector but given economic growth and demand for office space, commercial real estate looks quite stable.
To ensure the safety of retail investors SEBI has adopted lots of risk mitigation tools, few of them are:
1. 80 Percent of the project should be developed with ready income generation
2. 90 Percent of the income needs to be distributed in two parts during the year
3. Promoters should maintain at least 25 percent of stake even after listing
Embassy Office Parks REIT which is the first one to enter into the fray looks quite promising, jointly promoted by Embassy group and Blackstone PE, has almost 95 percent occupancy rates and major share of the parks are in Bangalore and Mumbai where commercial real estate is doing well, yield offered by this REIT is around 8.5 percent per annum with chances of capital appreciation also looking quite strong. In order to attract retail investors, the valuation offered is at a discount of 20 percent of the current market valuation. Other than discount and rental yields, REITs have much more to offer, which will be discussed in subsequent articles
From taxation point too REIT’s is also quite attractive as dividends like MF are tax-free in the hands of investors, interest portion will attract tax at margin rates. As far as capital gain is concerned, a holding of 3 years and above will attract a rate of 10 percent long term capital gain tax whereas less than 3 years will attract short term capital gain of 15 percent.
I feel REIT’s is here to stay and slowly but steadily will gain its share in the wallet of investors.
Will keep on updating about this vehicle.
Gloryon March 18th, 2019
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Shailesh Bishton March 19th, 2019
Really impressive deep thought & study