Indian households love real-estate. In India, the average family holds 77 per cent of its total assets in real estate, according to a July 2017 RBI Household Finance Committee Survey. These include residential buildings, buildings used for farm and non-farm activities, construction for recreational facilities, and land. Since 2014, the Securities and Exchange Board of India (SEBI) has also opened up commercial real estate for investment too.
In urban areas, many individuals often own one house and buy another one as an investment. They rent it out to generate a second income. Similarly, many wealthy people in India purchase commercial offices or shops, and lease them to businesses. However, managing a real estate portfolio is a challenge. There is a lot of physical paper that has to move around if you have to lease your premises. You have to be personally involved in signing the registration for rent and purchase agreements.
You have to renew your lease every year and continuously stay on high alert to protect yourself from fraudulent transactions. Real estate investment trusts, or REITs, are a new way of investing in the real estate market. These are mutual fund like-units you can buy from stock exchanges. They invest in rental income-generating real estate assets like shopping malls, office blocks and apartment blocks. These trusts have to distribute 90 per cent of the income they generate through rent. When an asset is sold, unitholders get the benefit of capital gains too.
There are three REITs listed in India that allow you exposure to commercial real estate in major metro cities like Mumbai, Bengaluru, Gurugram, and others. Over $3.5 trillion worth of assets are owned through such funds in the United States and a lot of retirement money finds its way into these funds. It is a very structured way of investing in income-generating real-estate. This column has advocated that money in physical assets is capital protection. That is mainly for those who do not want to risk their life savings into financial assets driven by market cycles.
However, REITs are a financial innovation that can allow you to enter and exit income-generating properties quickly. It is effectively the securitisation of real estate. That means people can trade in parts of that income-generating property. It is too early to assess the performance of these REITs, but considering their popularity in the United States and other markets, it should not take long to reach the same level. Besides, households in India prefer real estate to any other form of investment. The other realty investment option is the fund of funds. This is a mutual fund that invests in various available REITs around the world. Kotak Mutual Fund has launched such a fund for the Singapore market.
What this means for you
They say you should invest as the rich do. The rich, in India, mostly invest in commercial and residential real estate portfolios. Globally, about 16 per cent of the assets managed by family offices are invested in real estate, according to UBS, a global bank. Their last annual family office survey showed that real estate buying and management are essential for the first and second generations. It is not just an India phenomenon. This column has maintained that investing is only about equity assets. All other asset classes are capital preservation.
It may not be easy for you to start owning financial assets and equity-oriented ones. As stock markets move through cycles of volatility, you may want to continue keeping your savings in property and gold. One thing to do could be to look at options such as REITs for investment—for instance, instead of buying a second or a third apartment, or a commercial unit. As more individuals put their assets into REITs, professional companies managing properties can evolve around the country.
That would be a very structured way of channelising resources to the real estate sector. Offices are empty due to the pandemic now and prices of the three listed REITs on Indian stock exchanges are low. However, India’s economy is projected to grow at over 10 per cent in 2021-22 after contracting this fiscal. As businesses go back to normalcy, the demand for commercial real estate is likely to improve steadily, making REITs an channel for alternative investment.
Securitising real estate assets
Real estate investment trusts or REITs are a new way of investing in the real estate market. These are mutual fund-like units that you can buy from stock exchanges. REITs invest in rental income-generating real estate assets such as shopping malls, office blocks and apartment blocks
(The author is editor-in-chief at www.moneyminute.in)