Investors give a thumbs up to Embassy Office Parks REIT IPO

Headline : Investors give a thumbs up to Embassy Office Parks REIT IPO

Details :

News Summary

  • Recently India’s first real estate investment trust (REIT) was launched.
  • The initial public offering (IPO) offered by Embassy Office Parks, a global private equity firm, was open for investment.
  • The REIT was fully subscribed, which is a very encouraging sign for the real estate sector at large, and especially for the commercial segment.

 

About REIT (Real Estate Investment Trust)

  • A Real Estate Investment Trust (REIT) is an investment vehicle that allows people to invest in real estate and hold properties under it, and then lease it out to earn rental income.

Working

  • REIT generates funds from a lot of investors, to directly invest in properties like offices, residential units, hotels, shopping centers, warehouses, etc.
  • The properties owned by a REIT create income that may be passed to investors as distributions.
  • Unlike shares, investors in a REIT get units, similar to units in a mutual fund.
  • The trust distributes 90% of the income among its investors via dividends.

REITs in India

  • In India, REITs are only allowed for holding commercial properties.
  • A REIT needs to be registered via initial public offering (IPO).
  • REIT units have to be listed with exchanges and consequently, traded as securities.
  • As with stocks, the investors will be able to buy the units from either primary and/or the secondary markets.
  • The REIT platform has already been approved by the Securities and Exchange Board of India (SEBI).
  • In the latest amendment in March 2019, Sebi reduced the minimum investment limit in REIT to ₹50,000 from ₹2 lakh.

 

The advantages of REITs:

  • Higher dividend:: REITs provide for 90% of distributable cash to its investors and a regualar income to its investors.
  • Transparency: These are transparent as they disclose the capital portfolio annually and semi-annually. REITs are regulated by SEBI; hence chances of fraud are very rare
  • Easy investment: It is easier to invest in real estate using REITs.

 

Risks of REITS:

  • No History in India: Since it is the first REIT in India, there is no comparable data in terms of REITs performance or risks.
  • Prone to litigations and operational challenges: Real estate properties are always prone to litigation and operational challenges.
  • Low returns in future: With future development of new office spaces, the old buildings may lose premium to get higher rental. The management fee and operating expenses can rise, lowering the returns of investors.
  • 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.

 

Section : Economics

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