Are REITs An Option For Whiplashed Bond Investors?
In the long-run, total return on REITs will likely be better than comparable fixed yielding bonds, writes Kotak’s S Sriniwasan.
Real estate investment trusts and infrastructure investment trusts had been introduced by the Securities and Exchange Board of India as an investment option for investors over a couple of years ago. These regulations are designed to allow investors to earn a steady, regular and growing income from long term assets. REITs enable investors to capture rental income of real estate of completed real estate properties and InvITs capture income of infrastructure assets revenue like toll roads etc.
While the regulations had been notified for a while, and a couple of InvITs are already listed, the after-market performance has not inspired investor confidence. The existing regulations had restrictions in terms of the minimum size of applications (Rs 2 lakh) as well as in the trading lot, which impacted liquidity.
At some level, the poor performance of infrastructure stocks could also have had a contagion effect on these InvITs.
Most recently, SEBI changed the regulations enabling greater retail participation by reducing the threshold of retail participation to Rs 50,000. SEBI has also allowed other changes in leverage etc. which have a positive effect on REITs. From the perspective of a potential investor and the market, these are welcome steps.
Retail investors do not have the means to invest in income-producing commercial properties. These not only generate regular returns but also grow with time as rental escalation provides a hedge to inflation. India is home more than 300 million square feet of office space, substantially occupied by multinationals like Accenture, IBM, JPMorgan, Microsoft, Google etc. Many of these office assets will be available for the retail investor to participate through REIT listings. That’s the only way a retail investor can collect rent from such marquee companies! The first REIT in India is expected to open for public subscription in the coming days.
I dare say that these contracted rentals with in-built escalation appear more attractive than some infrastructure assets which have challenges on account of regulatory changes, and dependence on some government regulations, which has historically been a ticklish issue.
For investors who have been swaying between the risks that have come about in bonds and bond funds as well as volatility in the equity market, REITs offer an extremely attractive option with steady and growing income. It would be a mistake to compare the immediate return on REITs with other bonds since the growth that can happen here, cannot in bonds.
In the long-run, the total return on REITs will likely be better than comparable fixed yielding bonds.
Of course, investors must read the specifics and understand the asset portfolio and consult their financial advisors. For now, the regulator has once again been pragmatic and listened to market feedback and taken effective steps to develop and deepen this market.
S Sriniwasan is the managing director of Kotak Investment Advisors and Kotak Realty Fund.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.