The IPO of Embassy Office Parks REIT, India's first REIT to be listed, was recently fully subscribed. Embassy Office Parks is a joint venture between Embassy Group and private equity firm Blackstone Group. The launch of India's first REIT and its Initial Public Offering (IPO) has come as a positive move for the cash-starved Indian real estate sector.
About:
Real Estate Investment Trust (REIT) is an investment vehicle that provides an opportunity to invest in various projects by only investing in the units of a sponsor entity that will manage the paperwork and may be, even the hindrances of investing in the real estate market.
Working:
It is like a mutual fund through which one can invest small amounts and own units representing shares of various large companies.
REIT offers investors an opportunity to own units of commercial real estate.
The sponsor entity launches an REIT that owns the properties and then leases them to earn rental income, which is then distributed among the unit holders.
REIT regulations mandate the distribution of 90% of the rental income to unit holders. The remaining 10% can be used for business purposes.
Benefits:
There is ease of investment as investing in REIT is just like investing in direct equity that can be done through a demat account.
It also gives an opportunity to invest in commercial properties that will earn rental income (Commercial properties typically earn more rent than residential properties).
Since REIT is a publicly listed and traded instrument, liquidity is not much of a concern.
REIT is expected to bring transparency and liquidity in the real estate sector.
It also allows domestic and global investors invest in the real estate sector through a well-regulated investment vehicle.
Risks involved in investing in REIT:
A downturn in the real estate sector would impact rental income and also, capital appreciation.
Rentals would also be under pressure if the real estate inventory is huge due to lack of demand.
Real estate has been a preferred personal investment avenue for Indian investors for many years. So, increasing the exposure through REIT might not serve any purpose.
Real estate sector also suffers from litigation and compliance issues like title dispute, settlement of project affected people, environment clearance, state & central laws and political interference among others that can enhance the investment risks.
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