Note4students

From the UPSC perspective, the following things are important:

Prelims level: REIT

Mains level: Not Much

News

• The initial public offering (IPO) of India’s first Real Estate Investment Trust (Embassy REIT) was subscribed 2.5 times, with the share sale generating a demand of over Rs 5,300 crore.

What is REIT?

• REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.
• It is a company that owns, and in most cases operates, income-producing real estate.
• REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands.

How does it work

• Unlike shares, investors in a REIT get units, somewhat similar to units in a mutual fund.
• A REIT owns a number of rent-yielding commercial and hotel properties, and the unit-holders get a portion of this rental income in the form of dividend and interest income in proportion to their equity contribution.
• It gives the investor an option to buy partial stake in rent-yielding commercial properties, with the benefit of a professional manager managing these assets.
• Increase in rentals of underlying assets, improvement in occupancy rate and commencement of under construction properties are the growth drivers that an investor can
• The net distributable cash flows of the Embassy REIT are based on the cash flows generated from the assets.
• In terms of the REIT Regulations, at least 90 per cent of the net distributable cash flows are required to be distributed to the Embassy REIT.
• The trust distributes the cash flow to unit-holders in the form of dividend and interest income, generally, once every quarter.

Associated risks

• Since this is the first REIT issue, there is no comparable data in terms of pricing and attractiveness of the issue.
• Real estate properties are always prone to litigation and operational challenges.
• Even though its assets are in cities offering good rental clients, the rate of occupancy is always a critical factor.
• Also, with future development of new office spaces in upcoming areas, the old buildings lose their charm and thereby their premium to get higher rental.
• The management fee and operating expenses can rise, eating into the returns of investors. The biggest concern is the valuation of the units.
• Since the Net Asset Value of the REIT is based on estimated future cash flows and certain assumptions, it is difficult to gauge the margin of safety for an investor.