Two options in the real estate sector that allow a source of income as well as positive exposure to the industry
The real estate sector in India is one of the prime contributors to its economic growth. In fact, by 2040, the market is predicted to grow to Rs. 65,000 crore ($ 9.30 billion) from Rs. 12,000 crore ($ 1.72 billion) in 2019, and this in turn is poised to contribute 13 per cent to the country’s GDP by 2025. There is also a slew of opportunities for investors looking to reap the benefits of the potential in this market. Real Estate Investment Trusts (REIT) or Private Equity Real Estate Firms are two such opportunities in the real estate sector that allow investors a source of income as well as positive exposure to the industry. Very often people confuse the two as they invest in similar kinds of assets. However, they are significantly different in nature.
A REIT's structure is similar to that of a mutual fund; investors combine their capital to buy a share of commercial real estate and then earn income from their shares but with some key differences. REITs are required to pay a minimum of 90 per cent of taxable income in the form of shareholder dividends each year. This makes it possible for individual investors to earn income from real estate, without having to buy, manage, or finance any properties themselves. REITs are required to pay a minimum of 90 per cent of taxable income in the form of shareholder dividends each year. This makes it possible for individual investors to earn income from real estate without having to buy, manage, or finance any properties themselves.
Private Equity Real Estate:
Private equity real estate funds allow high-net-worth individuals and institutions like endowments and pension funds to invest in equity and debt holdings in property assets. Using an active management strategy, private equity real estate takes a diversified approach to property ownership. Partners invest in a variety of property types in different locations. Ownership strategies can range from new development and raw land holdings to complete redevelopment of existing properties or cash-flow injections into struggling properties. Individuals or couples seeking to invest in private equity real estate should locate a firm that specializes in the discipline. Upon examining a private equity firm's options of funds, they should understand the nature of each private equity fund’s structure, which is typically a limited partnership. Unlike direct buying, where an investment can appreciate significantly within a year, realty PE portfolios will appreciate only after 2-3 years. Realty PE funds typically have a tenure of 5-8 years.
Which one to choose?
The choice depends on investors and what they seek from their investment. If one is a retail investor looking for something short-term that involves liquidity, then a REIT seems like a viable investment vehicle. However, while choosing this option, an investor should keep in mind the possibility of exposure to price volatility and tax liability from REIT dividends. On the other hand, accredited investors with a long-term time horizon, higher risk tolerance, and no need for immediate liquidity may find that a private equity real estate investment is more suitable. Private equity investment in real estate is expected to bounce back to $6 billion, registering a 30 per cent year-on-year growth in 2021, on the back of an improving economic sentiment supported by policy reforms and growth in key emerging sectors, according to the latest report by Savills India. Apart from the commercial office segment which will continue to see steady improvement, the next wave of investments will be driven by growth in warehousing, affordable housing, and data centres.
India’s Real Estate Investment Trust (REIT) market will enter a period of prolonged growth, with more REITs forecast to be listed in 2021 and beyond. According to JLL, as REITs grow through organic and inorganic means and more of them get listed, the number of buyers and sellers will broaden significantly, further increasing market liquidity and yield compression.
The author is MD, Spenta Corporation.
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