India’s first Real Estate Investment Trust subscribed 2.58 times

From the UPSC perspective, the following things are important:

Prelims level: REIT

Mains level: Not Much

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.

Subscribe