It appears that the concept of wealth got crystallized when man erected a fence around a piece of land and called it his own. Otherwise, why would he construct formidable walls around the graveyards, when those outside wouldn’t want to get in and those inside wouldn’t ever come out! Ever since the nomad let down roots and started cultivation, mankind has coveted land and has now graduated to erecting architectural and functional marvels on it. At the moment we are witnessing the rise of an impressive temple which, in all probability, will be followed by a more impressive mosque in Ayodhya. The Sardar Vallbhbhai Statue of Unity standing tall on Sadu Bet island on the Narmada, while being touted as a tourist attraction, is possibly a subtle symbol of the might and “accomplishments” of the ruling juggernaut. Not to be outdone, D K Shivakumar of the Congress party, has announced his intention to erect the world’s tallest (114 ft) statue of Jesus Christ in village Harobele, a largely Christian locality in Kanakapura, DKS’s constituency. Never mind that none of these figures whom we claim to revere had any use or regard for these grandiose structures. Buddha attained Nirvana under a tree. The Mahathma lived in prisons or with others in modest ashrams or shelter provided by generous admirers, for most of his political life. Christ did not put brick on brick. Come to think of it, he had no religion. He was busy teaching his followers on the seaside, roadside, hillside or under the tree. Gardens were his secret prayer cells and the azure sky his cathedral. No wonder Victor Hugo, the reformist writer of 19th century, in his strange novel, The Hunchback of Notre Dame, talks more about the stone than soul and develops a profound contrast between stone and soul. He implies that soul becoming stone is the ultimate horror in religion,
Be that as it may; but we lesser mortals could certainly do with some valuable piece of real estate, if only as a hedge against overvalued equities, gold which is at an all time high and fixed income securities, including the ubiquitous bank deposits, yielding measly returns that hardly cover inflation. But the average investor may not be in a position to systematically accumulate in a calibrated manner an asset as lumpy as real estate. And therein lies the virtue of REITs (Pronounce REETs).
REITs are trusts like the mutual fund trusts, which collect funds from a pool of investors to be invested in income generating real estate assets. REITs come up with initial public offer to be listed on Exchanges. While retail investors can buy/sell units of REITs in the secondary market, they do have minimum investment requirement which has been reduced to Rs 50000/- (200 units) by SEBI from Rs 2 lacs (800 units) earlier, with a view to encouraging retail participation in this asset class. For an investor there are many advantages of REITs over buying property. Since REIT units are listed on the exchanges they are more liquid than property which being lumpy and fragmented is very illiquid. The quantum of investment is low as one can buy units of the assets instead of the whole property which could result in concentration risk while constructing an investment portfolio.
SEBI regulations require that REITs invest at least 80 per cent of the corpus in income generating assets and further stipulates distribution of 90 per cent of their net distributable cash flows to unit holders, at least once in every 6 months. Until recently India had only one listed REIT, Embassy Office Parks which was listed in April 2019 with a subscription price of about Rs 300. After a yearlong gap, country’s second REIT, Mindspace Business Parks has come out with a public issue. Both these are office REITs. In the three quarters since listing, Embassy has paid Rs 17.5 per unit, that is, an annualised 7.8 per cent on a unit price of Rs 300. The unit price which touched a high of Rs 512, is currently ruling at a subdued Rs 362 on the NSE thanks to Covid related challenges.
Asset profile of REITs could vary, which does have bearing on the return and its volatility over the years. For example, a look at the performance of REITs in the US market (where REITs have been in existence since 1960 and account for 96 per cent of the market capitalisation of property assets) shows that the office property segment has given an average of 12 per cent between 2009 and 2019. The volatility has ranged between a peak return of 35 per cent in 2009 and a low of -14.5 per cent in 2018. Residential property segment gave a higher average return of 16.7 per cent that decade. The peak return year was 2010, while lowest return of -5.4 per cent was recorded in 2013. Given that REITs are a nascent asset class in India, potential for growth is immense. As developers look at this vehicle to raise money, it is quite likely that REITs will cover more asset varieties like residential properties, data centres, hospitals, etc, providing the investors a broader spectrum of assets to choose from.
Rules of Taxation for income/gain derived from REITs differ from those applicable to other investment vehicles. Being a trust, REIT has to distribute income earned by it on the underlying investments (properties, securities etc.) in the same form as earned by it, that is, as interest, dividend, rent and capital gains. For unit holders, both interest and dividends earned from the SPVs (Special Purpose Vehicles) shall be taxed under the head “income from other sources”. However, the dividend income is taxable for the unit holder only if the dividend paying SPV has opted for a lower tax rate of 25.17 per cent under Section 115BAA.
Unit holder is required to pay taxes on rental income under the head “income from house property” if the REIT owns property directly. However, listed REITs in India have invested in the underlying properties through SPVs. Hence income for the REITs would be from interest and dividends paid by the SPVs.
Gains realised on sale of the units shall be taxable at 15 per cent, if the units are held for 12 months or less. Where units are sold after 12 months, the gains will be taxable at 10 per cent where such gains are more than Rs 1 lac in a financial year.
Any other income distributed by the trust is exempt from tax for the unit holder. However, on incomes other than interest, dividend or rent of the REIT, it is required to pay taxes which will adversely affect unit holder’s returns indirectly, because a trust is required to pay tax on such income at the maximum rate ( at present at 42.74 per cent), except in the case of capital gains.
In conclusion, investors have now a promising new investment vehicle which will help them further diversify their investment portfolio into a new asset class. The raging pandemic however, has cast a shadow on this fledgling asset class with subdued demand for commercial and residential real estate and consequent sluggishness in rental incomes. But this crisis too, like its predecessors shall pass. Nothing is forever and that is the mercy, as William Blake said, of eternity to time!
