Real estate company Embassy Group is soon expected to launch India’s first real estate investment trust (REIT) in March 2019 to raise around Rs 4,750 crore.
Embassy Office Parks is a joint venture between the Bengaluru-based property developer – Embassy and Newyork based private equity firm Blackstone.
Securities and Exchange Board of India (SEBI) had notified REIT’s regulations way back in 2014 but they never really took off in India.
So, what are these REITs? How does REIT works? What are the Pros & cons of Real Estate Investment Trusts? Should you invest in Embassy Office Parks REIT Public Issue (Mar 2019)? Let’s discuss..
What is a REIT?
Real Estate Investment Trust, is a type of real estate company which operates like a mutual fund. Mutual funds pool money from different investors and use it to purchase financial securities like stocks,government bonds etc.,
Whereas, REITs raise money from different investors to invest in income producing real estate properties. REITs can be a great opportunity for small / retail investors to participate in real estate market without directly investing in large scale properties.
How does a REIT work?
- REIT collects the money from the investors. These monies are invested mostly in rent generating properties.
- Properties generate rental income every month (periodically).
- REIT will distribute the rental income monies among the investors.
- The capital values of the properties may also raise over a period of time.
- The Net Asset Value of the REIT units may raise depending on the capital appreciation.
- The investors can also sell the units for gain/loss in secondary market (stock exchanges).
SEBI’s Guidelines on REITs:
- Minimum size of REIT should be Rs 500 crore
- The Initial Public Offer size should be of minimum Rs 250 crore
- The minimum subscription amount to an IPO is Rs 2 Lakh for a retail investor
- The market lot is fixed (1 unit) at Rs 1 Lakh. This limit is for trading in secondary market.
- The minimum public holding should be 25% in a REIT.
- Initially REITs are allowed to invest only in commercial properties and 80% of the amount should be invested in rent generating properties.
- The remaining 20% of the REIT amount can be invested in under construction projects,cash,real estate companies’ stocks etc.,
- Atleast 90% of the distributable cash flows must be distributed with the unitholders.
- NAV (Net Asset Value) must be declared within 15 days of valuation.
Latest Update (23-April-2019) – SEBI reduces minimum subscription requirement for REITs :
Markets regulator SEBI has reduced the minimum subscription requirement as well as defined trading lots for Real Estate Investment Trusts (REITs). While making an initial public offer and follow-on offer, the minimum subscription shall not be less than Rs 50,000 for REITs. Allotment to any investor shall be made in the multiples of a lot.
Currently, in the case of an REIT issue, the minimum subscription from any investor in an initial offer and follow-on public offer is not less than Rs 2 lakh.
Embassy Office Parks REIT Public Issue – Details
Bengaluru based Embassy Office Parks Pvt ltd was incorporated in 2012. It is into the business of real-estate including buying, selling, renting and operating leased or self-owned properties.
Embassy Office Parks has put 33 million square feet of office and hospitality assets under its proposed REIT comprising of seven business parks and four city-centric buildings spread across Mumbai, Bengaluru, Pune and Noida.
Out of the 33 million sq ft, about 24 million sq ft area is operational at 95 percent occupancy and yielding a rental income of over Rs 2,000 crore annually. Another 3 million sq ft area is under construction and 6 million sq ft area in the pipeline.
According to the Issue prospectus, Embassy REIT will use the funds raised for partial or full repayment or pre-payment of bank/financial institution debt of certain special purpose vehicles as well as for payment of consideration for acquisition of Embassy One assets.
Below are the few important details about upcoming Embassy Office Parks REIT Public Issue (March 2019) ;
- Embassy REIT Issue Opening Date : 18th March, 2019
- REIT Issue Closing date : 20th March, 2019
- Public Issue size : Around Rs 4,750 cr to Rs 5,000 cr
- Credit Rating : AAA by ICRA. The outlook on the assigned rating is ‘Stable’.
- Issue Price : Rs 299 to Rs 300 per unit/share.
- Minimum order quantity : 800 shares
- Listing at : BSE & NSE
- Issue Allocation Ratio : 75% to Institutional Investors and 25% to Non-Institutional Investors.
Investments in REITs & Tax Implications
- The dividends distributed by REITs
are tax free in the investors’ hands. REITs will pay the dividend distribution tax. W.E.F 1st April 2020, the dividends are taxable in the investors’ hands. The dividend income is taxable as per the slab rates applicable for FY 2020-21.
- REITs will be listed on the stock exchanges. The tax on Long Term Capital Gains incurred by the investors when they sell the units (REIT units) after 3 years of holding is 10% if the LTCG are in excess of Rs 1 lakh.
- The Short Term Capital Gains on the sale of units held for less than 3 year will be taxed at 15%.
Should you Invest in Embassy Office Parks REIT Issue?
Let’s now understand the Pros & cons of investing in REITs..
Benefits of investing in REITs;
- Transparency– REITs will be regulated by Securities Exchange Board of India (SEBI). Like Mutual Funds, REITs will be managed by professional managers.
- Hassel free – A retail investor can hold a small piece of a rental income producing real estate asset without going through the hassels of property buying and registration.
- Diversification – REITs provide a new opportunity to invest in different kind of real estate projects which spread across different geographies or locations. Also, investors can consider this as a new asset class in their investment planning.
- Liquidity – REITs will be listed on stock exchanges. The shares/units of listed REITs can be bought and sold.
- Industry growth – REITs can extend credit and financing options to developers and real estate companies. They provide an exit option to developers. REITs can buy properties from the developers and operate them. It will increase the depth of Indian real estate market. REITS will increase the flow of funds to cash-starved real estate industry.
- 90% of distributable cash flows have to be distributed with the unitholders. This may ensure regular income to the investors in the form of Dividends.
- The value of the properties held by REIT can go up leading to capital appreciation. This will increase the NAV of the REIT units.
- Implementation of policies like demonetisation, RERA, the Goods and Services Tax (GST), the Benami Transactions (Prohibition) Amendment Act, 2016 and the Pradhan Mantri Awas Yojana (PMAY), among others, have brought fresh hope to otherwise no-so-well regulated industry.
REITs & Challenges :
- SEBI has set the minimum subscription amount for a retail investor at Rs 2 Lakh. This is an entry barrier to small investors. It has clearly stated that the minimum subscription amount will soon be reduced. SEBI initially wants to test the waters. The cautious approach adopted by SEBI can be acceptable.
- As any other industry, real estate sector can get into a slump and you may not get regular income on the expected lines.
- The main selling point in case of REIT is the steady flow of rental income from the properties. The current average rental yield for commercial properties in India is around 5 to 8% (assumption). The investors will compare these returns with other fixed income products. If the rental yield does not increase then the attractiveness of REITs as an investment option may fade away.
- Another key challenge would be, ‘the property valuation process.’ There are no proper standards,procedures or benchmarks in India for property valuations.
Should REIT be part of your long term investment portfolio? – Answer is NO (as of now). It is too early to state that REITs can be successful in India as in the developed countries. The returns (income) can be on par with fixed income securities like bank FDs. Do not expect fantastic returns from REITs. The capital appreciation can be in single digits.
If you are ready to take high risk, not worried about safety of capital, expecting some periodic income and want to just diversify into a different asset class then you may test the waters with Embassy REIT Public Issue.
But, REITs can be a boon to Developers who are facing credit crunch and bankers/equity firms to cash-out their investments. Let’s all hope that REITs to be successful in India and provide a new investment avenue for retail investors!
(Disclosure : I am planning to subscribe to this IPO)
Continue reading :
- Checklist of Important Property Documents in India | Legal Checklist for Property Purchase
- List of all Popular Investment Options in India – Features & Snapshot
- 5 ways of transferring your Immovable (or) Real Estate Property
(The Public Issue details are based on the limited available information. If needed, these will be udpated/edited.)
(Image courtesy of Sira Anamwong at FreeDigitalPhotos.net) (Post first published on : 13-March-2019)