REITs of passage, loosen the straps
real estate investment trusts (REITs) are being eased to make them a popular alternative for households. REITs have been around in India since just before the pandemic and have underperformed, first on account of work from home, and then because of slacking demand for Indian ITeS. That is unfortunate, because these financial instruments provide retail investors access to low-risk, steady income from a diversified portfolio of rented office properties.
By segregating capital appreciation from rental income, and by keeping the dividend threshold high, the rules have been designed to make the investment ride less bumpy for retail investors. However, it is these rules that make REITs less popular.
Listed REITs have declined significantly as the Nifty Realty Index executed a smart rally on a post-pandemic revival in the housing market. The new rules being drawn up will allow investors fractional ownership through REITs.
This should address the disincentive in investors not co-owning the property portfolio they help to build. The smaller ticket size being proposed for REITs should also broaden their appeal. So far, REITs have been an instrument of choice for big realty developers and investors.
There is scope for smaller players to step up for this financing route to build office capacity. This would also formalise capital flow into commercial real estate, which can be expected to improve the quality of future supply.
While the regulatory intent is sound, investor interest in REITs may have to await a correction in the oversupply of rented office space and a diversification of demand beyond the infotech and financial sectors. The long-term outlook is robust given the share of real estate in Indian household investments.
