REITs – Real Estate Investment Trusts

The increasing incomes, urbanization and economic growth are majorly pushing the residential and commercial realty demand in India. The market size of the Indian Real Estate sector is expected to reach US$ 1 trillion by 2030 from US$ 120 billion in 2017 and by 2025 contribute 13% of the country’s GDP. Currently, the Real Estate sector contributes 6.3% to India’s GDP. This sector is growing at a rate of 10% p.a. From the past records, the returns from real estate investment have rarely been negative largely due to capital appreciation. It has also become a preferred class of assets for investments. But looking at the current property rates, buying a property is no piece of cake.

So how do people benefit from real estate without actually buying a property?

To overcome this hurdle, REIT’s were introduced.


Real Estate Investment Trusts or REITs are companies that own or finance income-producing real estate in a variety of property sectors.

A REIT is a security linked to real estate that can be traded on the stock exchanges. They are similar to mutual funds. Just like mutual funds, REITs also have sponsors, trustees, fund managers, etc. Both can be bought in units. However, like mutual funds have their underlying securities like stocks, bonds, gold, etc. REITs invest in income-producing real estate. REIT is basically investing in real estate without actually buying the property. The amount raised from the listing is invested in income-producing real estate like commercial office spaces, warehouses, malls, hotels, etc. The profits from these properties are then distributed amongst the investors. At least 90% of the taxable income should be distributed by a company to qualify as a REIT.


The US based REIT approach to real estate investment offering investors access to portfolios of income-producing real estate has been adopted by nearly 40 countries worldwide. Mutual funds and ETF’s offer the easiest and most efficient way for investors to add global listed real estate allocations to their portfolios.

Following is the comparison of the S&P US REIT Index with the S&P 500, indicating the trends over the years.

Launched on December 31 1992, the S&P United States REIT Index defines and measures the investable universe of publicly traded real estate investment trusts listed in the United States.

We can see that over the last 10 years, the returns from these indices have been similar. However, looking at the 1 year annualized returns the REITs index has largely outperformed the S&P 500 with returns of 16.24% compared to the benchmark returns of just 5.87%.


REITs have been introduced for more than a decade in India, but it was only in October 2013 that a draft guideline was issued by the Securities and Exchange Board of India (SEBI). However, discrepancies regarding the tax implications on the income earned and some other related aspects were restricting the instrument from becoming a reality. Though to overcome the issues there was some movement in the 2015 Budget, lack of clarity on a few things did exist.

The procedure for a REIT to get listed on the exchange is quite similar to getting a company listed. Necessary documents have to be submitted to SEBI, a red herring prospectus is issued, registrar and book running lead managers are appointed, and then the IPO is open for subscription.

Country’s first listed Real Estate Investment Trust – Embassy Office Parks REIT opened for investment between March 18 and 20, 2019. The company had planned to raise Rs. 4570 crore through the IPO. With a minimum application of 800 units and 400 units thereafter, the per unit price of the instrument was kept at 299-300, making it an investment of Rs. 2.4 lakhs. In the first month of its listing since April 1, it has managed to outperform the benchmark equity indices. This instrument delivered a return of 7.32% against the issue price of 300, whereas the NIFTY had gained a mere 1% in that period. One interesting fact about this IPO is that there were more than 10 book running lead managers, including top investment banks like Goldman Sachs, J.P Morgan, Morgan Stanley, Axis Capital and more.

To make REIT’s more attractive several amendments have been made in the past few years. As per the latest amendment by SEBI on 1st March 2019, the minimum investment limit has been reduced to ₹50,000 from ₹2 lakh. The minimum investment in the Embassy Office Parks REIT IPO is above ₹2 lakh as it was filed much before the amendment was made.


REITs in India are at a nascent stage. Seeing huge growth potential in the Indian economy, global investors are making huge investments to acquire large commercial office spaces to increase their REIT portfolios and thus this increases the scope for REIT’s as more and more commercial space would be needed to fulfill these demands. Also, the projected five-year returns on commercial assets are expected to be around 12-14%, hence good returns can be expected from REIT’s.

A recent report by JLL India had projected $35 Billion worth of office stock, that the commercial real estate market is likely to provide, around 294 million sq. ft of space that can be listed under REIT’s.

In the past few years, the government’s move to bring progressive alterations in India’s REIT policy has been a major cause for the increasing interest of investors in the commercial office space, making it more market-friendly. Progressive regulations, rising transparency levels and a healthy commercial real estate market in the country have made the segment a favorite amongst institutional and global investors, who have allocated nearly $17 billion in the form of direct investments.

Performance-wise, REITs offer stable cash flow and attractive risk-adjusted returns. Also, a real estate presence can be good for a portfolio, diversifying it with a different asset class that can act as a counterweight to equities or bonds.

Nimil Jain
Volunteer – Equity Research and Valuation
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

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