Reits now at your fingertips, but learn more before you jump in

With the minimum lot size reduced, should you consider investing in Reits? Pension funds are a good way to gain exposure to real estate, but it’s important that you understand how they work before investing in them.

Let’s understand what the new change would mean for you.

Change: Mutual funds are products such as mutual funds through which investors can own income-generating properties, such as commercial buildings and office spaces, in which they could not otherwise afford to invest. . Like mutual funds, if you invest in a REIT’s initial public offering (IPO), you will be allocated units. Before the change, the minimum lot size of a REIT was 200 units. This meant that you needed a minimum investment of ₹50,000 to 60,000 to buy a lot, if, say, the price of a Reit was around ₹300 per unit. However, at present, although there is limited clarity on the minimum investment required pending finalized guidelines, experts say the minimum investment requirement will likely apply to the purchase. units as part of the IPO, but one will be able to buy and sell a single unit of Reit on the stock exchanges like a share.

“We understand that the minimum request amount for ₹15,000 for the shares of Reit is in the event of an IPO. But since the exchange lot has been reduced to one unit, investors will be able to buy and sell a single unit of Reit in the secondary market, ”said Michael Holland, Managing Director of Embassy Reit.

The new regulations will help increase the investor base and improve Reits’ trading volume.

“The change makes it easier for a much larger investor base to access Reits. We started with 4,000 investors, and today we have about 12,000 investors. Embassy Reit’s three-month Average Daily Market Value (ADTV) is approximately $ 4.4 million (approx. ₹33 crore), while that of one of the major listed real estate developers is around $ 35 million. The developer has higher trading volume in part because of the single share trading lot size, which in turn results in a higher number of shareholders and more liquidity. It’s a virtuous cycle, ”Holland said.

Higher trading volume means better liquidity, which in turn means investors can get in and out with ease. “The reduction in lot size will benefit investors and the entire REIT industry. This is a welcome decision and shows the increased confidence in industry participants. The previous limit of ₹50,000 was high for small investors. Decreasing the minimum size will bring these investors into the market and lead to increased retailer participation, better liquidity and efficient price discovery, ”said Amit Bhagat, CEO and Managing Director of ASK Property Investment Advisors.

Plus, reducing the lot size to one unit brings Reits up to par with fairness.

“With that, it also opens up access to various indices like any other stock, which would further improve liquidity,” Holland added.

If a stock is part of an index, it helps to further improve liquidity as the volume of transactions increases.

Invest in Reits: Reits are a good product for someone looking for commercial real estate exposure and willing to stay invested for a long time. By investing in Reits, the investor can achieve predictable dividend returns and also benefit from the appreciation in the share price.

Sebi regulations require Reits to invest 80% of their assets in developed and income-generating assets. Currently, the Reits are only allowed to invest in commercial real estate and office space. They must distribute 90% of the rental income in the form of dividends. REITs also receive interest income from the Special Purpose Vehicles (SPVs) through which they hold properties. They lend money to SPVs and distribute interest income among unitholders.

Reits’ returns may increase with rising rents and leasing of vacant space, and the addition of new properties to the portfolio through new developments or leasing of projects under construction, among others.

The profits of a REIT can be impacted by a slowdown in new leases and the renewal of leases. An oversupply of commercial space in one location can affect the rate of rent increase. The ongoing pandemic is raising concerns over demand for commercial real estate, but experts believe the impact will be short-term; in the long run, Reits could do better.

“Investors should look to Reits for long-term stable income with the potential for capital gains. They should invest a percentage of their income in the segment based on their risk appetite and current exposure to the real estate industry, ”Bhagat said.

Mutual funds should be used as an asset that can help outperform fixed income securities over the long term.

However, rather than focusing on a single Reit, it will be better for an investor to spread their investment in the segment over two or three Reits.

Currently there are three Reit listed in India.