The Economic Times Wealth digest
lists the top dividend paying stocks. Its edition on 26th April 2021
listed Embassy Office Parks REITs as one of the top dividend yield stocks with
a dividend yield of more than 7%. Michael Holland, the CEO of Embassy REIT says
that they have distributed more than Rs. 3,400 crores as dividend since getting
listed in January 2019.
As of 29th April 2021,
there are three listed REITs in India - Embassy Office Parks, Mindspace
Business Parks REITs, and Brookfield India Real Estate Trust. Brookfield India
Real Estate Trust has strong Canadian interest and other FPI presence. The market
buzz is that DLF and Godrej will announce REITs soon. According to JLL, US$ 36
billion worth of real estate could be listed in the form of REITs in India soon.
The REITs space in India has seen
much action in recent times – Insurance companies can now invest in debt
securities of REITs and InvITs which will give a fillip to the sector. Tax
leakage was plugged in the recent budget bringing in much cheer in the sector.
REITs and InvITs are the latest asset classes which have found favour with the investors.
Earlier, SEBI in its April 2019 circular has reduced the trading lots of REITs and InvITs as follows, making it affordable for the retail investors:
REITs REITs and InvITs are the latest asset
classes which have found favour with the investors.
According to SEBI, mutual funds have
invested a staggering Rs. 3,972 crores in REITs in 2020 and Rs. 9,138 crores in
InvITs in 2020. And this being a Corona pandemic year!!
So, what exactly are these REITs and
InvITs? Why is there so much of interest and action around these investment
are real estate investment companies or trusts which invest in real estate.
Equity REITs invest in shopping malls, student hostels, homes, healthcare
avenues and offices and commercial real estate. They rent out the commercial
space owned by them and whatever rental income is generated is the income of
the Equity REIT. This income is distributed as dividend to the REIT unitholders.
REIT is like a mutual fund of the real estate. They mobilize the savings of the
retail sector, get the money from pension funds, insurance companies, HNIs,
corporate treasuries, endowments, bank trusts etc., and buy real estate
(residential and commercial) from the real estate developers. These properties
are then leased out/rented out and the net distributable surplus of the REIT is
distributed pro rata to the REIT unitholders.
regulations of United States require that an equity REIT distribute at least
90% of its rental income as dividends to the unitholders. Mortgage REITs on the
other hand fund mortgages by buying mortgage-backed securities or by loans. They have interest income. In the USA, 90% of
the REITs are Equity REITs and 10% of the REITs are Mortgage REITs. One major distinction between REITs and other real
estate companies is that a REIT must acquire and develop its properties
primarily to operate them as part of its own portfolio rather than to resell
them once they are developed.
SEBI has mandated that a REIT invest at least 80% of
its investments in rental generating projects. It has also mandated that at
least 90% of the income of REITs in India needs to be distributed as dividend income
amongst the REIT unitholders. This is in line with international best
practices. For investors seeking good regular income, this would be welcome
news. The US experience has been that returns on Equity REIT (capital
appreciation) are less than the returns on high growth stocks but more than
that of corporate bonds. So, an investor who prefers regular income with
capital appreciation which is more than that offered by corporate bonds could
opt for this vehicle of investment.
According www.reit.com, in
2019 American REITs:
The FTSE NAREIT All Equity REITs
index outperformed the S&P 500 of the United States in 16 years out of the
last 25 years.
comparison of data from NAREIT and the Bureau of Labor Statistics of USA
reveals that, since 1992, annual REIT dividend growth in the US has exceeded
inflation as measured by the Consumer Price Index (CPI) of USA every year
except 2002 and 2009. This comparison is up-to 2013. This also serves the purpose of
portfolio diversification. Having only equity in the portfolio can be extremely
risky and volatile.
According to the data available at
www.reit.com in the
period January 1978 to December 2012, in the US, equity REIT performance
exceeded both the broad equity market and other forms of real estate investment
by more than 1% point per year, producing an average annual return of nearly
12.9%. As such, a US $100 million investment in equity REITs at the beginning
of that time would have been worth more than US $5,500 million by the end. For
the period 2013 to 2018, the average return on the FTSE NAREIT All REITs was
around 7.85%. A comparison of real estate returns in the US over rolling
five-year periods for the period from January 1976 through January 2013 further
illustrates the strength of REITs’ long-term performance. Equity REITs
experienced 100 five-year periods during which their average annual total returns
exceeded 20%. They experienced 85 five-year periods of average annual total
returns between 15 and 20%. The US experience has been that REITs have higher
Sharpe ratio, in general, as compared to other asset classes. The Sharpe ratio
shows how efficient portfolio returns are relative to risk assumed in the
portfolio. A higher Sharpe ratio indicates a superior risk adjusted performance
compared to a lower Sharpe ratio.
It is estimated that all REITs in USA
approximately own US $ 3.50 trillion in gross assets. The market capitalization
of FTSE NAREIT All Equity REITs Index including mortgage REITs is US $ 2.50
trillion. REITs in the United States own and operate property across twelve
diverse sectors like retail, residential, infrastructure, healthcare, office,
industrial, self-storage, data centers, lodging etc. The listed REITs in USA
raised US $102 billion in public offerings in 2020 and this despite 2020 being
a Corona pandemic year.
Benefits to the Economy
The above clearly demonstrates that a
well-developed REIT sector gives a fillip to the economy creating jobs and purchasing power and positively impacting the GDP. In
times like these, India could also benefit from a vibrant REITs sector. Real
estate is the second largest employment generating sector in the economy when
one considers the residential, retail, hospitality, and commercial real estate
sub-sectors. A vibrant real estate sector positively impacts construction,
steel, cement, architecture, marketing, town planning etc. creating jobs (both
direct and indirect) and purchasing power. It gives a fillip to the GDP and is
a booster shot for the economy. It is estimated that this will be a US$ 650
billion sector in India and have a 14% share in the country’s GDP by 2040.
According to a CRISIL report, Singapore,
and Japanese REITs account for nearly 50% of the market capitalization of their
respective country’s real estate sector. The corresponding figure for the
United States is 96%.
REITs and InvITs provide avenues for
money to flow into real estate and infrastructure sectors thus reducing the
pressure on the banking system, which is heavily burdened especially in the
absence of a vibrant and robust Indian bond market. Foreign investment into
Indian REITs is also a very welcome feature.
The Government has announced its
ambitious Pradhan Mantri Awas Yojna (PMAY) by which it aims to provide housing
for all by 2022 – the 75th year of India’s independence. As of date,
REITs in India have been allowed only in the commercial real estate space with
the residential real estate space yet to be accessible for REITs. According to
an estimate by CRISIL, India will need Rs. 50 lakh crore by 2022 for its
These ambitious targets call out for a vibrant REITs ecosystem with funds
flowing in from FPIs, DIIs, HNIs and from retail investors.
These neo-emerging asset classes, as
of date, have a combined asset size of more than US$ 10 billion.
The real estate market in India is facing
turbulent times with depreciation in property prices in Corona times and
builders are facing the issues of rising inventory. Real estate owners are
finding it difficult to sell their units at a high price. Monetization of
property units is becoming a big issue for both owners and real estate
In such a scenario, REITs provide a
good opportunity for investors who want to utilize the benefits which the real estate has to offer and for developers to monetize their assets.
Experience of Singapore, Hong Kong
The performance of REITs in
Singapore, Hong Kong, Malaysia, Europe, and Australia is extremely promising.
According to the data available at www.fifthperson.com wherein they have published the
returns on Singapore REITs for the last ten years and analyzed returns of these
REITs from IPO to 31st Jan 2019, the top three Singapore, Hong Kong
and Malaysian REITs would have given the following annualized returns:
The above returns are considering
non-participation in rights’ issues and excluding brokerage, currency costs and
taxes for non-Singapore residents.
These are higher than the bank fixed
deposit rates and higher than the rates of corporate debt. It is also a good diversification
Singapore, USA, Europe etc. not only
have very vibrant REIT markets, but such REIT markets are so strongly developed
that there are many REIT ETFs which are performing well.
Benefits to Investors
Today, nearly 40 countries have
adopted REITs and most of them permit overseas investments into real estate.
The American investment consulting firm, Wilshire Associates, constructed an
optimal portfolio and considered two scenarios - one with global investments in
listed REITs and one without. The asset classes considered were stocks and
bonds and real estate and cash. They reported that the portfolio with globally
listed REITs reported a higher return and lower risk than the portfolio without
globally listed REITs.
Interest rates in the United States
and Europe continue to be low. As such, high dividend paying REITs are a better
alternative to corporate debt. If an FII (Foreign Institutional Investor) is
investing across the globe where interest rates are higher (say India), global
REITs would be a good diversification tool and an instrument to increase
portfolio returns. This augurs good news for India as this entails robust
foreign flows both in the debt market (as interest rates are higher in India
compared to the developed world) and in the REITs sector.
Having some amount of exposure to
REITs in one’s portfolio is not only a good diversification strategy but also
an excellent tool to beat inflation.
Indian parents traditionally advise
their children to invest in Gold and Real Estate. Financial planners advise one
house property for self-stay and are not in favour of multiple residential
properties as rental income in India on residential property is at best 4% to
As such, REITs provide the
opportunity of higher dividend income and a chance to participate in the real
estate success story compared to lower rental income from residential property.
Many HNIs invest in multiple properties and REITs give them an opportunity to
benefit from the real estate sector without the problems of protection and
security of the physical property, liquidity, maintenance costs etc.
A well-regulated REIT gives stable
dividend income and an opportunity to benefit from the real estate boom. REITs
are the mutual funds of the real estate sector. They are managed by professionals
and regulated by SEBI, with their performance regularly reported in the media
and scrutinized by analysts. They are audited by statutory auditors. Investors can
compare different investment avenues and there is a lot of transparency. This
gives REITs far greater credibility than the unregulated chit funds and ponzi
InvITs are funds which invest in the
infrastructure sector (roads, ports, highways, bridges and flyovers, power
plants, gas pipelines etc.,). SEBI has mandated that 80% of their assets should
be in the completed income generating projects and no more than 20% of the
assets should be in developing and under construction projects. SEBI has also
mandated that 90% of their cash earnings should be distributed as dividends
twice a year. Since this is the infrastructure space with very long-term
horizon, institutional investors and HNIs, are the ideal investors. For the
retail investor this is an evolving space, and more clarity is required. Those
having a long-term view only should be investing in these.
REITs are here to stay. However,
experts hold divergent views about the future of commercial office space in the
light of the new normal of Work from Home. Experts differ about the percentage
of work force that will return full time to the office space. Nevertheless, it
appears that the REITs will be in a sweet spot in the foreseeable future!
The author is a visiting faculty at
NMIMS and the CA Institute.