ValuePickr Forum

Real Estate Investment Trusts

Very soon within two months we are going to get first REIT listed. Even after reading too much in news papers I dont get idea how it will work. Some doubts are following.

  • Commercial property is giving 7-8% annual return as rent. 90% of rent received will be distributed as dividend.If we add the price appreciation of property with time, return should be more. How this price appreciation component of commercial property will be appropriated by investors.

  • Tax implications in the hands of investor/ REIT for regular income or capital gain.

  • Will there be something like NAV ? It will be traded on exchange at NAV or market will decide.

  • As per news one should expect 7-8% return. As per my understanding if I invest myself in commercial office space I can expect 7-8% as rent + inflation5-6% = 12-14%. Why is it less ?

Sorry to be naive here. Please help to understand REIT.

why this ? the two of the Invits Indigrid is yielding 13% and IRB Invt yielding 16%.

Indigrid projected to grow 5% yoy as well, very stable business.

Go for that instead.

I dont know about InviTs.

Do we have risks that evolves out of Public Private Patnership, concession agreement & its legal issues like that of Noida Toll Bridge. What is InviT’s portfolio and weightage of constituents (single project investment or multiple)?

16% yield (2 times that of risk free return ) is too high to believe as a stable yield in the long run.

thats y i said look at indigrid and yield is high bcoz risk is high for IRB .

Hi Rajesh
REITs you would have similar rates as you get in normal commercial property which retail investors get.
REIT Cap Rate envisaged by Embassy is ~8% which with all the leakages would be ~6% dividend yield. This with ~5% rental increase per year which is inline with inflation.
Following are the advantages of REIT:
Where a REIT property beats investing in direct commercial property investment is you can invest a much lower amount than what is required to buy a good commercial property. Secondly you would have rental income from MNC clients which generally is difficult for a normal commercial property (tenant risk is low).Thirdly you would not have negligible chances of title issues as the big builders have done a better due diligence and this diligence gets checked multiple times (financial institutions and MNC clients also check). Fourth you would have a diversified client, area, city mix (which a single commercial property would not have).
I still don’t feel REITs are good investment at ~8% cap rate - world wide REITs always trade at a 100bps to 200bps premium to Government Bond Yields (in India this is 7% so dividend yield should be 8% at least which makes the cap rate as 10% (but in India real estate has premium attached due to shortage of good property).

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Thanks for answering my question. When we buy property ourselves, we get rent as well as price appreciation. So anytime we can appropriate this gain in property price. Will REIT not give any price appreciation ? Please.throw some light here too. Also the lease agreement is for six years now a days with 7% incresse after 3 years. After six years it can be extended on mutual agreed terms. How can they increase 5% rent every year.

yes you would get price appreciation in REIT also… in line with rental income increase… as rental income increases the price of property would increase so theoretically the price of your units should also increase (but practically it may not happen if cap rate increases, increase would happen only if cap rate comes down or stays stable)…
Generally the contract with MNC clients is for rental increase of 15% every 3 years… so effectively it works out to be ~4.75% p.a. plus you have under renting which would further provide help increase the rentals… the terms are better for Grade A properties than for individual properties…

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I have significant investments in REITs overseas (NRI). Just my few cents…

Reits are of different types: office (higher risk, high maintenance, higher yield), retail(higher risk, higher maintenance, higher yield), industrial (lower risk, lower maintenance cost but lower yield) and medical (low risk, higher maintenance cost, low yield but long tenancy). Or combination of the above (majority of REITS)

Risk depends on the property types mentioned above and the quality of the property, tenant (multinational vs struggling small company), length of the lease (longer the better vs shorter average tenancy), yearly rent increases, leverage (very important) and the management (also very important to figure out how the management gets paid for managing the properties, are their interests aligned with all other shareholders or do they get paid more just by adding properties to the portfolio by taking loan for example, do they get paid a proportion of NAV)

90% of income after expenditure is distributed as dividends and usually there is some single digit increases (not guaranteed though) - increasing rental income leads to price appreciation.
Usually every property is valued every yearly by a certified valuer to arrive at NAV for the whole portfolio - this leads to price appreciation if NAV increases every year. Property values could go down (for eg if there is oversupply of commercial properties leading to competition)
Share price will also be determined by interest rates (if interest rates go up REITS under perform and vice versa)

In summary not all REITS are equal - quality and the type of property portfolio, tenant, management incentives, leverage and lease tenures are the key things to look at.

Cheers

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U did not mention that IRB is risky due to high yield. That’s y I asked that question. But REITs may have much lesser risk.

Anyone planning to invest in Embassy REIT? I am going to apply

NIce article in Businessline on how it works. And yes you will get the benefit of the property being sold at a higher price if/when it happens.

One can go through the final doc in which they have given 3 yrs cash flow projections (Page 334).

https://www.sebi.gov.in/filings/reit-issues/mar-2019/embassy-office-parks-reit_42323.html

I have not done my own calc but read somewhere that they plan to give current yield of 8.25%. Based on these projections, expected DPU will be Rs 30-32 in FY21e. This will be 7%+/unit post tax which is quite low on immediate return basis. It does make sense for FIIs which have low tax (5-10%) withholding. I think it should be available at least @9% yield in the next one year post listing. However, if anyone planning to hold till FY23 it might give double digit post tax return. Not planning to invest immediately but will be on my watchlist.

Main difference in the case of REIT versus InvIT is that the assets are perpetual in REIT. Whereas in the IRB case the Mumbai Pune expressway for example will stop yielding anything after the concession agreement ends.

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What’s the tax on rent received by investors from REIT? In case one receives rent on a directly owned property, I believe one is taxed only on 70% of the rent. Is it the same case here?

Not true, Indi Grid Trust also owns asset on a perpetual basis but rented out for few decades. Based on the condition they might get extension. As per the Invit, the transmission lines could last 50 yrs which is as long as we could survive. Even office buildings might need to be rebuilt within 50 yrs.

@KunalKothari as far as I know rental/interest income from REIT will taxed at a marginal rate with no exemption.

Pardon me if my question appears naive…

In case of a equity IPO, one can value and judge the IPO price on basis of PE multiples.

How does one value a REIT ?
Basically, what i want to understand is that how can one judge if Rs.300 / unit price is expensive or not ?

Hi Sir,

It is on NAV basis. You will be allotted with units of the REIT.

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This is a very interesting investment vehicle and a direct comparison must be made with an existing Indian REIT listed on Singapore Exchange. CNBC suggests it has outperformed Nifty by 4% over 10 yrs. I was surprised that it has shown 14% revenue CAGR in INR terms over the decade. The vehicle has done well despite the fact that their Singpore investors have suffered INR depreciation.

https://www.a-itrust.com/

I am afraid NAV might not be sufficient to derive comfort. For me actual yield and projected 3 yr yield is more important to arrive at a rough IRR which is what matters. NAV will come into picture when they want to raise new funds. I think the yield is not sufficient here for the next few yrs at least. It will be good to park 5-10 Y funds here though. There was a similar excitement when Invits came and we saw what happened. It will take few yrs before we have sufficient investor base to absorb these kind of instruments.

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Hi,
I have some doubt regarding passive income we get as unit holder. As per my knowledge,min. 90 % of distributable cash will be distributed to unit holder in the form of dividend and interest in equal ratio. So for examole, if pre-tax yield is 8% means 4% dividend (tax free till 10L of total dividend income) & 4% interest (= 2.8% if comes under 30% tax slab). So at the end, in the hand of unit holder( with 30% tax slab) post tax yield is 6.8%? please clarify if I’m getting it right! thanks
NOTE :- I’m not considering anything from capital appreciation of units and LTCG & STCG tax after selling it, in calculation as that part is clear.

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