REITs are attractive, but a separate asset class
Experts are of the view that Real Estate Investment Trust (REIT) must be classified as a separate asset class because many investors are unsure of the company’s nature and obtaining finance has sometimes proven difficult.
Mumbai: Experts are of the view that Real Estate Investment Trust (REIT) must be classified as a separate asset class because many investors are unsure of the company’s nature and obtaining finance has sometimes proven difficult.
Not to mention that REIT is an asset with ‘phenomenally low’ short-term betas but generates attractive returns both from distributions and capital appreciation. Apart from liquidity (all Indian REITs must be listed on exchange), it also provides a steady stream of dividend income along with a sense of pride in owning physical, real estate assets. REITs must distribute at least 90 per cent of their net distributable cash flow (NDCF) to investors. Attending a panel discussion, which was conducted by Misra Centre for Financial Markets and Economy at the IIM Ahmedabad recently, Mike Holland, CEO of Embassy REIT (India), said, “SEBI has been helpful and accommodating, adjusting regulations to suit the investors.” He also felt that REITs have been increasingly popular among investors in the United States, Asia, and India, in particular.
The US has seen a surge in the share of institutional investors. Mike observed that it is reverse in India. SEBI encouraged larger
institutional participation in REIT investment during the initial years as retail investors gradually learn about REITs over time. At
the Embassy IPO in 2019, there were about 4000-unit holders in terms of numbers, which has multiplied several times since then.
“So, we’re seeing a very rapid acceptance and understanding of the REITs as a product. And that’s resulting in increasing numbers of shareholders. But in terms of value, it is still very, very much an institutional product, both domestic institutions and international”, he explained.
Moderating the panel discussion, Prof Prashant Das, Associate
Professor of Real Estate Finance at IIM Ahmedabad, said that the real estate markets are not efficient. As a result, risk-reward trade-offs in real estate may differ from our typical understanding derived from general finance. In the US of 1960s, only bigger investors had access to the big-ticket commercial real estate investments that promised low risk but higher returns. This was unfair to a retail investor who couldn’t afford to invest in commercial real estate. With that motivation in mind REITs were introduced in the US REITs which were originally intended to bring such investments to retail investors, he said.
The panelists discussed how REITs were perceived by investors in the United States, Asia, and India, in particular. Dr Barry Bloom, President and COO, Xenia REIT, USA, stated that since REITs have been introduced in the US for a long time, it is mostly considered as a part of the broader equity market.
Prof Masaki Mori, Associate Professor, EHL Lausanne, Switzerland, speaking on how Japanese REITs (JREITs) and Singapore REITs, which began in the 2000s, have changed over time, stated that the start of JREITs was a little slow and bumpy due to the global financial crisis, but it picked up speed with the help of the Bank of Japan and Abenomics. The ‘Offices’ dominated the property diversification in the Japanese market at first, but other types – Residential, Retail, Hotel, Logistics, and so on – progressively entered the picture.
The conversation cruised through property diversification in the
United States and India, as well as whether the Residential property type had potential. Explaining the difference between money management styles in USA and Asia, Mori said, “The biggest difference between US REITs and Asian REITs is the management style…most Asian REITs are externally managed, while most US REITs are now internally managed.”
Discussing the impact of Covid, Bloom acknowledges that the focus in the hotel industry has switched from the business to the leisure segment. In the United States, the leisure segment has been strong, and the market is progressively improving.
According to Mike, the REITs market in India has held up well – “India has the unique advantage that it caters largely to the technology or technology-enabled segments. So that has been really the source and the foundation that allowed us to give that resilient performance through the Covid period.” The panel further discussed the market outlook and the asset’s ability to generate attractive returns for investors. Inclusion of REITs into broad market indices and independent REIT indices helps the sector through larger demand from ETFs.