Working from home with people from the IT industry is becoming more popular. This has led to a rise in the demand for office space rentals. Real estate investment trusts (REITs) that were hurt in the post-covid world now have better business prospects.
Trust: A REIT is a group of income-producing real estate assets held together as special purpose vehicles. A REIT is a type of trust (SPVs). Regulations say that at least 80% of these assets must be finished and making money.
List: Brookfield India Real Estate Trust is called Brookfield REIT in India. Embassy Office Parks REIT is called Embassy Office REIT in India. Mindspace Business Parks REIT is called Mindspace. When a REIT goes public, investors can buy shares in the company. They can also buy REIT shares on the stock exchanges after the company has been on the market.
In return for their money, investors get
If you own units in a REIT, you get a share of the REIT’s net distributable cash flow (NDCF) every few months. There are two ways that a REIT makes money: through interest and principal repayments on loans it makes to the project SPV and through dividends, it gets for owning a stake in these project SPVs. In order to figure out how much the NDCF is, all REIT expenses are taken out of its income.
Even though REITs must give out at least 90% of their NDFC to unitholders, there is no guarantee that the amount of the NDFC itself will be given out at least once in six months. All existing REITs pay out money every three months. The three REITs have yields of 4-5.6 per cent based on the current market price and the most recent nine-month distributions (April to December 2021). Regular income: REIT units trade like stocks, so unitholders have the chance to make money or lose money on them. It turns out that REITs are a kind of hybrid product that can make high-risk investors very happy.
Some of the money REITs payouts can be tax-free, making them more appealing to more people. It was tax-free for unitholders to get dividends from Brookfield REIT, Embassy REIT, and Mindspace REIT in the December 2021 quarter (Q3 FY22). This is because these three REITs paid out a lot of dividends. People who get money from a REIT are taxed on it at their income tax rate.
It’s not taxed because the project SPVs of the three REITs haven’t changed their tax rules, says an expert. This is because the project SPVs haven’t changed their tax rules. The loan repayment part is tax-free because it is just a return of capital.
People who make short-term capital gains when they sell REIT units are taxed at 15%. People who make long-term capital gains when they make more than Rs 1 lakh a year, including those on equity investments, are taxed at 8%. In both cases, there is a surcharge and a cess. If the units have been held for less than 36 months, the capital gain is short-term. If the units are kept longer, the gain is long-term.
What to remember
The first step for investors is to look at the NDCF, or the amount of money available for distribution to unitholders (at least 90% of it) and whether the REIT can keep or grow it. If you want to think about the first REIT to be publicly traded in India, look at Embassy REIT. It was the first REIT to go public in 2019. The REIT made a little bit less money in FY21 than in FY20. Some good things were going on, though. The NDFC for April-December 2021 (9M FY22) was up 20% from last year, thanks to a rise in lease rental prices, acquisitions of assets, and a surge in hotel occupancy. Other than Mindspace REIT and Brookfield REIT, the other two didn’t come on the market until August 2020 and February 2021. They have a short history of being sold.
It also helps to know if a REIT has a wide range of assets in different parts of the world. For example, Embassy REIT has a lot of exposure to Bangalore, a prominent IT and tech centre in the country. When it comes to Brookfield REIT and Mindspace REIT, both have business parks and office assets in cities like Mumbai, Hyderabad and Pune. Brookfield REIT has business parks and office assets in Mumbai, Hyderabad and Pune.
Another thing to look for in quarterly investor presentations from REITs is how many properties are occupied and how many assets are available for purchase.
What do you want to do?
REITs may look like a steady source of regular and mostly tax-free income, but they are not risk-free. As a reminder, the post-covid period comes up again now and again. Though, then, there has been a rise in commercial real estate. REIT prices have gone up by 10-17% in the last six months. For 12 years, Mehta has been keeping an eye on the market. He points out that it’s too soon to say that the market has bounced back. In the case of a REIT that also owns some hotels, one needs to watch how business travel grows.
Despite the recent rise in the price of REITs, the current yields on REITs look good. Investors can be safe by investing in REITs in stages rather than all at once. This is because the market is still volatile, and the commercial real estate market is changing.
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