A real estate investment trust (REIT) is a company which owns, operates, or finances income-generating real estate. This investment option is modelled after mutual funds whereby REITs pool the capital of numerous investors, thus making it possible for individual investors to earn dividends from real estate investments, without buying or having the obligation to manage or finance any property themselves. This concept was first introduced in the USA in 1960 and very soon, became quite popular, being launched in nearly 35 countries. The reason behind its popularity was its promise to offer more returns in the long run as compared to equity markets. And now, with a global presence for 60 years, it has grown up to be $ 2 Trillion asset class.
In India, a new era of the real estate sector began with the successful launch of the first REIT listed by Blackstone and Embassy in March, 2019. This event marked the opening of a new investment avenue and heralded a bright opportunity for the country's real estate sector.
However, in 2020 as the pandemic struck, impacting every sector on a global scale, the real estate sector too, was not untouched. The commercial segment, which had shown promise only a year earlier, also found itself scarping through in the aftermath of the pandemic. Having reported that, it is still observed that REITs have immense potential in the Indian market. Mr Sanjay Dutt, MD & CEO, Tata Realty believes that “India has approximately. 650 million sqft of Grade A office space of which, 310-320 million sqft is REITable stock. India's office stock would touch 1 billion sqft in the next 6-8 years and in the next two years, nearly 100 million sqft is expected to be listed on Indian Stock Exchanges. Therefore, the asset class presents itself with tremendous opportunity and growth to all class of investors.”
REIT is a comparatively safe investment option for investors, as eighty per cent of its underlying assets are operational and income-generating. The operational assets have low credit risk since they have a proven track record of revenue generation. Along with the dividend payments, investors also receive recurrent interest repayments like a fixed loan product. The secure nature of both kinds of investments is the reason for REIT being an attractive investment option for retail unit buyers. Moreover, the dividend portion of the income from REIT is non-taxable and the post-tax returns of REITs are almost double the returns from fixed deposits, recurring deposits, government bonds and other classes.
However, since the concept of the REIT is still at a developing stage in India, it is understood that an investor would compare it with other well-established investment options like mutual funds and other equity products. But even if they do that, India's single REIT has outperformed the market, and this not during just ordinary circumstances but during an ongoing pandemic too, when lockdown restrictions led to a sharp drop in the stock market. It has also been observed that over 20 years, all REIT index in the US outperformed S&P 500 by ~440 basis points. But in India, a single REIT beat equity markets by ~2000 basis points in just five quarters since its launch. The product is still fresh in the Indian market, but with increasing awareness of its benefits among the market participants and acceptability by retail investors will make REITs the success story of the decade.