All you wanted to know about office REIT

After a year-long gap, the country’s second real-estate investment trust (REIT), Mindspace Business Parks, came out with a public issue recently. Both Embassy and Mindspace are major office REITs in the market. REITs can be structured for any type of real-estate properties such as office REITs, retail (malls), hotel, data centres, infrastructure, and diversified REITs.

REITs have been quite a hit in Asian markets such as Singapore and Hong Kong and are an emerging asset class in India.

Office REITs are investment vehicles that own, operate and manage a portfolio of income-generating office properties in order to generate regular returns for investors. These are usually commercial properties that are already generating rental income. For now, in India, there are only two REITs, predominantly owning office properties. The working of (office) REITs are similar to mutual funds where money is pooled from a number of investors, with the difference that they invest in rent-generating properties. Regulated by SEBI, the market regulator, a REIT has a three-tier structure. There is a sponsor, who is responsible for setting up the REIT; the fund management company, which is responsible for selecting and operating the properties; and the trustee, who ensures that the money is managed in the interest of unit-holders.

REITs come up with an initial public offer to be listed on the exchanges. While retail investors can buy/sell REITs in the secondary market, they do have minimum investment requirements of ₹50,000 (200 units); this was reduced from ₹2 lakh (800 units) by SEBI to encourage investor participation.

Investing in real-estate, especially commercial properties, involves large amounts of money, so for those investors looking to diversify a portion of their portfolio into real-estate, REITs are an option.

According to SEBI guidelines, REITs are to mandatorily distribute 90 per cent of their income to unit-holders. The distribution could be in the form of dividend or interest income or a combination. The REIT also earns income by way of capital appreciation at the time of sale of any of its underlying properties, thereby boosting investors’ returns. Embassy REIT, for instance, was able to generate 7-7.5 per cent yield to its unit-holders in FY20. Mindspace’s yield, too, is expected to be around 7 per cent per annum.

Further, 80 per cent of the value of a REIT should be invested in completed and rent-generating properties, ensuring visibility in returns for investors.

While REITs can generate regular returns, they come with their own risks and investors should be wary. Both rent and capital appreciation from a REIT depends on the location, infrastructure and industrial development of properties held by it. While this risk is mitigated with properties diversified across locations, challenges remain. With many working from home since the outbreak of the pandemic, office properties could face a significant slowdown in demand. Further, delays in construction of commercial properties and delays in leasing decisions could impact the revenue generation of the REITs at least for the next 2-3 quarters.

However, given the lack of quality office space in the country, some of these uncertainties could be temporary. For instance, both Embassy and Mindspace REITs were able to maintain over 90 per cent occupancy since March and were able to even collect 90 per cent rental during the lockdown period. Also, with many real-estate players facing liquidity crunch in the last 2-3 years, mostly on account of low demand, rent-generating properties can be monetised by the developers in the form of REITs. And they can generate a steady income stream for the investors.

As long as the pandemic rages, even REITs are not immune.

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