Which type of investors find investment in REIT/ InvIT suitable for their needs?

The current write-up seeks to explore the following Q & A:

Qs: Which type of investors find investment in REIT/ InvIT suitable for their needs?

Ans:The investment is ideal for any investor with a risk-return profile falling between equity and debt.

 

v  In India, investment in REITs/ InvITs is highly regulated by SEBI and it is now possible for any investor (retail or institutional) to invest in them through stock exchanges.

v  Investment is undertaken in exchange tradeable instruments which are termed as “units”

v  These units of REITs/ InvITs are issued by special financial vehicles which source money from various investors and invest the same in income generating real estate assets/ infrastructure.

v  The legislative framework  provides safety to investors and the taxation framework gives these vehicles a pass-through status to benefit the investors by avoiding multiple taxation points

v  The units represent a proportionate share in the financial entity, comparable to equity stock

v  The periodic returns derived by these financial entities are distributed amongst their investors.

 

ü  Advantage 1, regular income: Investors gain by way of regular income

ü  Advantage 2, stability: Since real assets form the base for the REIT units, prices are more stable than the common equity shares

ü  Advantage 3, capital appreciation: When underlying assets increase, the appreciation of the underlying assets is captured in the price of tradable units

ü  Advantage 4, regularly increasing income-flows: The instrument’s structure imputes the incremental nature of rental flows

 

Debt Investors

·    What do debt investors seek: A debt investor looks for high yields and periodic returns to meet cash requirements. Safety of principal is paramount.

·    Disadvantages/ Shortcomings of debt investing: The periodic yields are high but principal (capital) investment suffers in the long term. This is because the principal amount of debt remains constant all the time. If invested in longer time horizons, other asset prices (equity/ commodities/ real estate) get inflated during cyclical upswings. (e.g. during quantitative easing)

·    Advantage of REITs: The presence of underlying assets means to a debt investor (a) stable values of capital investment (b) high periodic yields representing interest earnings. Additionally, the investor gets two benefits that are not available in case of debt i.e. a) the revenues from underlying assets grow with time due to periodic increment in rentals b) the capital value of investment units increase with underlying asset price increase.

 

Equity Investors

·    What do equity investors seek: A typical equity investor looks for high growth of capital stock and is ready to undertake risks. Yields in the form of dividends are of lesser importance to most equity investors.

·    Disadvantages/ Shortcomings of equity investing: Possibility of high capital appreciation but no incomes in the intermediate period. Risk of losing capital and timing the market incorrectly. Not realizing gains at the appropriate time or realizing them too soon.

·    Advantage of REITs: The presence of underlying assets means to an equity investor a chance to get appreciation as in the case of equity investing. High periodic yields are unlike normal dividends from equity investment. Also, periodic returns have the most likelihood of increasing gradually over time. The advantage of stability of a REIT investment is very unlike equity investment.

 

Investors with a mix of Debt–Equity (a portfolio mix)

·    What do these investors seek: The investor chooses a mix of debt and equity depending on his risk profile. From the equity portion he seeks high rate of growth but undertakes risks while almost forgoing intermediate income from investment. The debt portion compensates/balances this with high regular yield and safety.

·    Disadvantages/ Shortcomings of portfolio mix investing: This type of investing takes care of shortcomings of both debt and equity and is ideal in theory. However, in practice, the psychological impact on an investor influences his investment decisions and in-turn decides how an investor can reap the benefits of investing. Investors can seldom manage counter-acting market forces in actual practice, by staying with a disciplined and focused approach to this debt-equity combination investing. Very often an investor is unable to stay invested and withstand the market gyrations.

·    Advantage of REITs: High regular returns from REIT investment keeps an investor’s morale high in times of downturn and the investor can comfortably remain invested during such periods. In times of market upswing, the investor considers alternative investment avenues too before exiting (which will fetch similar returns) and does not go solely by the CAGR of the investment till exit. All these factors help fetch maximum capital appreciation, in actual practice, for investors vis-à-vis a simple debt-equity mix.

 

Alternate asset investors (Real estate Investors)

·    What do these investors seek: Some realty investors seek capital appreciation.  Some seek high rental cash-flows. Still others may want a combination of both. However, property appreciation from underlying property is important for all realty investors to accommodate changes in the purchasing power of money.

·    Disadvantages/ Shortcomings of real estate investing:  Bulk money requirement, illiquid investment, legal and transaction issues, personal involvement for physical maintenance etc. are some of the disadvantages of this physical investment form.

·    Advantage of REITs: Quite like physical real estate in terms of the ownership experience (financially) REITs come without above-mentioned disadvantages. REITs invest in properties that generate high regular rental return. Additionally, REITs’ appreciation from underlying property happens over long time-frames to accommodate changes in the purchasing power of money. The appreciation is reflected in prices of REITs instruments being traded in stock exchanges. 

Pension and retirement investors (Retirement Corpus planning)

·      What do these investors seek: Investors seek regular cash-flows. They also wish to protect their capital over time as one of the biggest fears is inflation eating into capital.

·      Disadvantages/ Shortcomings of a typical corpus fund yielding interest (debt investing):  Longevity may prove to be a bane for these individuals as capital gets eroded or the inflation makes their cash flows inadequate.

Advantage of REITs: REITs generate high and increasing regular rental return. Additionally, REITs’ appreciation from underlying property happens over long time-frames to accommodate changes in the purchasing power of money.

REIT and InvIT investment are a favorite of pension funds like the Canadian firm, Brookfield or the Singapore Pension fund, GIC, for the above-mentioned reasons.