Podcast Overview –
Real estate makes up 77% of the total assets of an Indian. Many have made a lot of money through real estate investments. However, REITs have given exceptional returns in the global markets. Watch this podcast to know everything about REITs, how they differ from real estate, and what kind of returns can be expected in India. Read the transcript:
Darshan Doshi (00:08)
Welcome to Swatantra. My name is Darshan and I have my partner Jaydeep with me. And very quickly, Jaydeep, what are we doing at Swatantra?
Jaydeep Doshi (00:17)
So thanks, Darshan. So at Swatantra, we are here to simplify investments for you. Taking investment decisions, informed investment decisions independently is the entire objective of creating this series by the name Swatantra. Here we want to talk about all the investment avenues that one has, the do’s and the don’ts about those investments and make sure that we help people take decisions independently on the basis of our information.
Darshan Doshi (00:53)
Fantastic. So we want to focus on investments. We want people to take decisions and manage their money. Jaydeep, before we get started on today’s topic, a quick overview of who is Jaydeep and what is Proinvest.
Jaydeep Doshi (01:06)
Yeah. So Proinvest basically started in the year 2000. It was started by my father. And we are basically a long-term investment, we are into basically long-term investing. We don’t do anything that is speculative in nature and we are very passionate about wealth creation and that’s how we have evolved over time. And today I play a role of fund manager where Nirmiti is one of our advisory products, where we actively managed equity portfolios for our clients.
Darshan Doshi (01:43)
Brilliant, brilliant. So very quickly, at Dasar, financial independence is very important. And that is why we are doing this podcast series on investing. At Swatantra, like Jaydeep said, we want to simplify investing and we want people to make wealth, to be happy, to live a long life, and money plays a big part in it. So today’s topic is one of the oldest assets, oldest investment vehicles in the world. We are going to talk about real estate and we are going to talk about the new avtaar of Real estate, which is called REIT. So, Jaydeep, my first question, one of the oldest investment vehicles is real estate, but REIT is the new avtaar. What is REIT and how did it come about in existence?
Jaydeep Doshi (02:27)
Yeah, you’re right. It’s a new avtaar, but not so new. Maybe new for India, but globally. REIT came in in 1916 in the US first. In India, 2007 SEBI approved that they would be having REIT’s in India. It took about ten years for the first REIT to get approval. And in 2019, it got listed on the exchange, which was the embassy REIT.
Darshan Doshi (02:53)
So what is REIT?
Jaydeep Doshi (02:55)
So REIT basically is a hybrid equity and fixed income product. It’s something between fixed income and equity product. And the basic essence about REIT is that it can offer you capital acquisition by way of any property which has been sold through that and as well as regular income in the form of rent or in the form of dividends that one can get.
Darshan Doshi (03:23)
And how many such REITs are there to invest in today?
Jaydeep Doshi (03:28)
We don’t have too many options. We have only about three. Brookfield, Embassy, and Mind Space, three REITs. All of them are doing very well compared to fixed income or equity. Since it’s a hybrid product, it definitely gives you a flavor of both equity and fixed income.
Darshan Doshi (03:46)
Ok, you know what, at Swatantra, we want to simplify investing. Right. Real estate is very simple. You buy a piece of land, you buy commercial space, you buy a house and you’ve invested and you get rent out of it or you get capital appreciation. Is REIT just a digital version of real estate or what is really happening?
Jaydeep Doshi (04:08)
Yeah, you can really see that because it’s in the form, as units are credited in the Demat account. It’s definitely a digital version and it’s a hassle free way of investing and getting an exposure to real estate. So REIT, basically the parties who are involved in an REIT is basically a sponsor, manager, trustee, and people like us who are the investors or unit holders there. So sponsor is the key person who clubs in all his assets or existing real estates which are fetching him regular cash flows. And then there’s a trust which is formed which overlooks at how the operations are done correctly and the investor’s interests are taken care of and safeguarded. And there are unit holders like us who will invest in those in these units. And there is a manager who will manage the entire show, collecting rents, compliance and everything. Basically, to give you an example, Embassy has a partnership with Blackstone. So Embassy and Blackstone are the sponsors, trustees is Axis bank there, and the manager is also REIT, Embassy REIT, who’s running the show and managing the entire thing. So this is how the entire gambit of REIT. So REIT basically gives you an option to choose to be a part of certain units or commercial properties which are already established and have been let out for long-term to various corporates. There are even hotels which are part of these REITs. So basically you become indirect owners of these properties. Why I say indirect? Because you don’t actually own these properties. You are just part of it. And that’s why I mean, it’s evolving in a big way. To give you an example, normally people do keep telling us that they want to buy properties here and there. But if I had to buy a sea-facing property in Bandra, it’s not possible for everybody. Right.\? And if you see if you remember Rajesh Khanna, the most popular actor in Indian cinema, he had bought his house for three and a half lakh rupees which was a sea-facing property and he sold it for about 85 crore rupees in about 44 years. So if you calculate the CAGR return, it’s about 20%, 19%. And all I want to say is that there are these prime properties. Right? And not everybody can get exposure. Through REIT’s we can definitely get one.
Jaydeep Doshi (07:18)
Okay. So to simplify investing, the way I understand this, you have companies like HUL and I go on the stock market and I can buy shares and become a part-owner of HUL. So REIT is basically nothing but real estate which these real estate companies have listed, and then I can buy a part of it by buying units of whatever that REIT is sponsored by whatever company, maybe Embassy. Now that’s great, right? I don’t have to make an investment upfront to buy say 2000 sqft or 20,000 sqft, which is an upfront cost, which is what you’re saying. But from a returns perspective, how has REIT performed in comparison either to the index or to mutual funds?
Jaydeep Doshi (08:10)
So in India we don’t have a very long history to give you the precise returns. But definitely till now REITs have been outperforming the equity markets. The first REIT which got listed as of today I think is delivering about 15% CAGR return. I’m talking this based on the recent which they have disclosed. And equity markets are slightly below that. But if you see REIT, you should not see it from such a short duration time, we can take some empirical data from the global markets where these products have been listed for about 50 years and any investments over ten years or 15 years in REITs have outperformed equity markets about 2% or 3%. So we can definitely maybe if you go for about ten years data rolling data, you would have instances where equity has done slightly better than REIT or vice versa. But definitely when you for ago bout 10 years or 20 years, then REIT have been outperforming equity markets in general.
Darshan Doshi (09:24)
Again, simplifying this a little bit. Right. I have a stat which says that an average Indian has 77% of his or her total assets locked in real estate. Tremendous concentration, right? Now in comparison, REIT, there is about 650,000,000 sq ft of commercial-grade A space which is available in India, out of which about half of it, 300 million sqft is REI table, is what the number says. So just from a trends standpoint for the next ten years, where do you see real estate investment that the average Indian has been doing versus getting into REIT, which can be as simple as buying mutual fund?
Jaydeep Doshi (10:22)
Definitely. It’s a very upcoming thing right now. And if you compare it with actual real estate, definitely from the growth perspective, REITs will do well simply because of the lower base that they have right now. Real estate, as you know, globally is like the biggest asset class. It’s bigger than equity markets. It’s bigger than the debt market and everything. So definitely REITs are going to be one of the as our economy formalizes, I think REIT will pick up surely because of the ease of buying great properties, ease of selling them, ease of even taxation. Because once the document, once you know the tax labs and the different types of taxes that you’re liable to pay from an REIT income, then life becomes easier. I mean, it’s well documented. Unlike buying physical real estate where you have to take care of the land or you have to be sure that this investment is going to be the best investment that you have done here. You at least get a basket of investments. To give you an example, now Embassy has investments in Hinjewadi IT Park, it has investments in Bangalore Embassy Park, it has in Noida, it has in BKC. So I mean, sitting in Pune, I don’t think I have any scope or any understanding a person like me has any understanding about buying any assets outside Pune. And I think this is the classic way of investing where I don’t have to look forward for tenants. It’s only a matter of time when people start reporting the benefits of REITs. And I think ten years down the line, if you watch this video, I’m sure it’s going to be quite fulfilling to know that REITs have come a long way.
Darshan Doshi (12:15)
Since COVID, I’ve seen a lot of real estate properties come up. Of course, COVID had its own set of challenges, but can anyone, any real estate builder have the eligibility to put up REIT? What is the criteria around this?
Jaydeep Doshi (12:34)
Yeah. So there are about four to five key criteria for getting REIT approval. One is that 90% of the assets have to be revenue-generating. 90% of the total revenue has to be distributed in the form of dividends. 80% of the total assets have to be cash-generating. 10% of the entire income has to go in building up new assets or new construction. Asset base of that company has to be more than 500 crores and they have to report the NAV twice in every year. So these are the key criteria while getting an approval in REIT.
Darshan Doshi (13:20)
So the way I understand this is well regulated, right. So there is good precautions around it. As an individual investor who does not know REIT is well protected, what is the real advantage of having REIT over real estate?
Jaydeep Doshi (13:39)
Yeah. So REIT has several advantages and I want to elaborate on each one of them. One is diversification. So like I told you before, when we buy an REIT, we get exposure to properties in Pune, Mumbai, Delhi, Chennai, and prime properties in all these places. Also, it doesn’t end here. You can actually get exposure to global property. So property in Manhattan can also be a part of an REIT. You can sit in India and absolutely be a part of these properties also. And not just real estate, but also REITs do have, like I said, hotels, they have malls. You can be part of malls. They can have even hospitals as part of it. Nowadays, the most upcoming thing is about the warehouses that are there. So whichever asset can generate a free cash flow and can generate regular income can be a part of this rating. So sitting in India, sitting in Pune, we can obviously own few properties or be a part of these properties globally and make sure that they make sense to our investments also.
Darshan Doshi (14:59)
Brilliant. So geographic diversification, which otherwise would be very difficult to manage or even get to know. And the second part is not just commercial real estate or home real estate, residential real estate, but hospitals. Wow. I mean that’s phenomenal. Warehousing. Its just amazing.
Jaydeep Doshi (15:18)
There are a few more advantages also which need to be which one has to know actually. One is that they are well regulated. A lot of time you have seen that real estate investments go in the opposite direction. Builders run away, things like that. So when these are regulated and established properties, you don’t really have to worry whether they are going to come up or not. So these are major challenges when you directly buy a physical real estate and when you buy it through REIT. Also, all the REITs have long term lease, especially the Embassy one, their lease is for nine years. So they have long term customers ,all MNC well diversified between IT, then Pharma, then Banking. So spread across various sectors also. So that allows me that helps me. That gives me a confidence that I don’t have to look out for the tenant or anybody or have to keep renewing the lease, which is like the biggest problem when you do it yourself. So here it is, well regulated, well diversified. Again, you don’t have to worry about lease. The best thing is you don’t even need a large chunk of money to buy it. So you could just do every month you could buy one lakh or whatever your capacity is. This way you don’t have to worry about getting a big sum together and then going ahead and buying the property.
Darshan Doshi (16:53)
I know you’re saying you could invest about one lakh, five lakh and you can do SIP of it. But what is the minimum amount that you can put?
Jaydeep Doshi (17:00)
So it’s like now the Embassy REIT trade somewhere around Rs 388. It’s like buying one share of worth Rs 388. So you can buy as low as Rs 388. Real estate if it’s a part of your portfolio, definitely REIT is the way to go forward in terms of simplification, in terms of documentation, in terms of transparency, in terms of liquidity, in terms of diversification, regulation. These are when you put big money, normally if you buy a house or a property, it’s about a crore rupees or 50 lakh rupees. So this is like best thing. When you put 50 lakh rupees, you have all the kind of assurances. And that’s why REIT is very popular globally. In India we are habitual to go and Hunt for properties and we have that, I don’t know, but maybe we feel very confident about doing it. But I think this is the safest way of getting exposure to real estate and most transparent.
Darshan Doshi (18:03)
What about the returns? When I have invested, suppose I invest one lakh rupees in REIT. When am I going to get my dividends? They are dividends, right?
Jaydeep Doshi (18:14)
Yeah. Basically the income comes in two, three different forms. One has to understand and one of them is rent. Second is through sale of properties and also through the fixed asset investments that these REITs do, so fixed income investments that these REITs do. So each of these three have a different taxation when it comes to income tax. Since I have been one of the investors, I have seen that the company sends you the entire details about the taxation for each for the breakup, about the dividends that have been credited to your account. So that’s how it is. And also the best thing is that as per the SEBI rules, every six months they are supposed to distribute the dividends. So one doesn’t need to really go and check whether the money has come periodically after every, once in six months they have to do companies like Embassy and all of doing it quarterly, actually every quarter they are trying to do.
Darshan Doshi (19:19)
There’s nothing more brilliant than getting into the bank account every three months or six months.
Jaydeep Doshi (19:24)
They don’t have to do anything differently. It’s just that whatever rent they are receiving they have to put it in the bank account of the unit holders and the sponsors basically.
Darshan Doshi (19:35)
So Jaydeep, this is great. But I know that majority of Indians still prefer investing in hard real estate. Real real estate where you can touch and feel and own and figure out all the different things. So given that REIT is still picking up, when does it make sense for anyone to actually buy real estate?
Jaydeep Doshi (20:04)
So I basically am a strong believer that it’s part of your asset allocation because you don’t want all your money to go to equity markets, you don’t want all your money to go to gold and you don’t want all your money to go to fixed income or fixed real estate also. So for me it’s about 5 to 10% of my total assets should go there because it depends from person to person. Anybody who’s looking for fixed income and has the appetite for taking risk about the real estate cycle, then you should definitely can have more allocation towards real estate because equity markets in India barely give you 1% dividend. So here the track record, at least for Embassy, which is hardly about three, four years and not just three, four years, these four years have been very challenging for the real estate sector because rentals came down, they got renegotiated during the COVID times and despite that they have been delivering 15% returns to their investors. I think the best time to judge an asset is how it performs during the bad times. And REIT is a classic example to know how it is done during the bad times. And I remember in 2019 when they got listed, they came at around Rs 300. The issue had come at Rs 300. Today it’s about Rs 388 and about Rs 26 of dividend. So it’s like a fairly nice way of investing into markets in a formal way. So if Rajesh Khanna has got 19% returns in about 44 years and real estate REIT has given you about 15% in bad times. Still, I do respect these.
Darshan Doshi (21:47)
Absolutely. So Jaydeep, one of the things is taxation. They say death and taxes are permanent and so I’m sure there is some taxation on REIT. Can you just help understand how is this applied to REIT?
Jaydeep Doshi (22:04)
Perfect. For quite some time India didn’t have a clear taxation actually for REITs, but fortunately now it’s penned down and we all can know what the taxation is going to be. So basically any income generated in the form of dividend, rent or interest is taxed as per your income slab. And if any unit which has been sold by the REIT by the Trust, if any unit has been sold after 36 months, then it is treated as long term and it’s taxed like 10% on the gains. And if it is short term, that is less than 36 months in this case it is 15%. So pretty straightforward and like I said earlier, it’s well documented and whenever you get these dividends the company will give you a break up about the entire dividend that has been credited to your account and all you have to do is just send it to your Chartered Accountant and take it forward.
Darshan Doshi (23:05)
So pretty straightforward. No complexity when it comes to taxation. Love this part. My next question to you and maybe the last one for this podcast could be how do you evaluate REIT? When it comes to real estate, it is very simple. Location, location, location. Right? But in REIT there are a lot more other factors. So how does one select it?
Jaydeep Doshi (23:35)
Yeah. So it’s tough one definitely and one has to really study in detail or read the prospectus of the RIETs that they choose. But there are few things that one can easily get information on is the weighted average lease period for the REIT and second is the Occupancy. So these two, the weighted average lease, if it’s higher, the better basically. And Occupancy will tell you how many units are on the lease and the ones that are not. So I think that should give you a fairly good idea. But like I said, one has to really read the prospectus or get into the details and study before choosing any REIT.
Darshan Doshi (24:23)
Absolutely. For any investment. For any investment I would say that. So REIT up and coming, real estate has been booming. There is also a lot of speculation based on the people I’ve talked to that real estate in India is already at a global high in India, but at the same time they expect further high returns in the next ten years. So I know this is an all speculative nobody has a crystal ball to predict the future, but what are your thoughts on the trends of real estate overall?
Jaydeep Doshi (25:04)
If you talk about decades, maybe it could be right. And I’m talking simply on a few thumb rules that I follow. And equity asset class only has about a 10-11 year cycle. If you go to real estate, it’s about 20 years cycle. And if you are assuming that the last ten years or if data suggests that the last ten years equity markets have done better than the real estate market, then definitely next ten years, real estate will have to catch up to make so that as the general cycle of real estate is and gold is about 30 years. So that’s how I simplify it for myself. So if last 10-11 years, if you have not made money in real estate, probably the probability is quite high to me. Decent returns now.
Darshan Doshi (25:51)
All right.
Jaydeep Doshi (25:52)
There’s no data which suggests that this is going to be the answer.
Darshan Doshi (25:56)
You’ve covered advantages of REIT over real estate. I’m sure there are at least a few disadvantages of REIT. What are they?
Jaydeep Doshi (26:05)
Yeah, you’re right. Obviously, there are going to be a few disadvantages. The ones that I think are very important is you physically don’t own any of the properties. So tomorrow, if you have to start any business, you’ll actually have to go and buy out a real estate and convert these units into physical real estate. And second thing is, it cannot be bought on leverage. If you see in India, most of the properties are bought on loans and EMIs and things like that. So definitely these REITs cannot be bought from the point of view of leverage.
Darshan Doshi (26:39)
No. And that leverage also gives you some taxation benefits as well.
Jaydeep Doshi (26:43)
That’s a very important point. Yes.
Darshan Doshi (26:46)
We are talking about this whole REIT real estate outside of the first home. Right. We are looking at REIT real estate as an asset class purely from an investment standpoint to make money in the future. Swatantra, this is the first podcast of our podcast series where we simplify investing. Jaydeep, I am so excited to do this podcast series with you and decode demyth everything that there is about money, about investments. So subscribe to this channel. If you want to reach out to us, reach out to us. I’m available at dd@dasar.in. Jaydeep, how do people reach out to you?
Jaydeep Doshi (27:31)
You can reach out to me by sending an email on jd@proinvestnirmiti.com.
Darshan Doshi (27:36)
You will find a lot of good content around this. We do a lot of writing, we do a lot of podcast reach out to us. We have a lot of events coming up. If you want to be participating in these events, you can go to www.dasar.in. You can reach out to Proinvest on their website as well. And if you have questions, if you want us to cover a particular topic, the best way to do it is to reach out to us or comment on this YouTube or Instagram or Facebook or Twitter or LinkedIn, wherever you might be. So we’re looking to have a lot of fun, learn in the process and hopefully you are having fun in this and learning in the process, too. Thanks.
Jaydeep Doshi (28:20)
Thank you.
