REIT Vs. Real Estate investment

 A quantitative analysis is the need of the hour

 

Average daily dollar trading volume of REIT according to a reit(dot)com was $7.2 billion in April 2017, up from $3.7 billion in April 2012 and $2.9 billion in April 2007. Why people in India have taken almost half a century to find an appetite for REIT needs to be analysed. The phenomenon that was a buzz in US since 1960s came to India in 2007 when REIT was introduced by SEBI in India. We took so much of time in concluding that the lesser risk, more safeguards and enhanced liquidity are better than the opposite. To make a comparative study of investments in REIT and direct investment in similar real estate property basket and to come out with some quantitative model is the need of the hour.

Datastream, UBS estimates as on 22.6.2020

In the above Spider graph by Datastream, if all the legs in the graph are speeding out wide means that region is cheaper. Though three of the above graphs are of real estate performance one is particularly about REIT. And you can easily observe that the index of PCF (Price-Cash Flow) is significantly bigger in case of Hongkong's HK REIT than that of Properties.

Investment in REIT has typical edge over direct real estate investments. If a person buys or sell a house property he can’t purchase or sell it in tiny pieces commensurate to his real time requirement but it is possible through investment in REIT shares. You can buy or sell some of your shares whenever you want.  Also, bulk of dividends comes from rental income and not from Capital Gains so that one’s steady flow of income is assured.

India where SEBI (REITs) regulations came in 2014 is not alone in its experience of sluggish start. Even in US the first REIT was set up in as early as 1961 it took several decades for REITs to be accepted as an investment vehicle. Investor familiarity to the vehicle is the main issue behind it. REIT introduced in India by SEBI had to bear a lot of trouble getting off the ground. The country saw its first REIT – Embassy Office Park – in as late as in 2019 after nearly five years and five sets of amendments and multiple tax tweaks.

But if we should take any clue from the only REIT performance  it seems to be on a robust path now. In a Price movement graph published online for a period of 13 Feb’19 to 13 Dec’20 on Dalal Street Investment Journal we can observe that Embassy REIT has mostly stayed significantly upper than S&P BSE Realty index.

Interest income and rental income from property held directly by the trust, is not taxable in the hands of the REIT though Capital Gains would be taxed at the rate of 10% if the units have been held for more than 36 months, which is taxed at 15% in other cases

According to Forbes.com, In 33 years of past, REITs have returned more than 12% annually. This is in comparison to the roughly 10% return of the S&P 500 and the 6% - 8% return of private real estate funds during the same period.

(Author - Hemant K Das)