The real estate investment market in India is experiencing rapid growth. In 2023, the country made significant strides in developing a modern international system of real estate investment trusts (REITs). This market offers a multitude of investment options, with funds providing opportunities for income even with small investments. Foreign investors are not required to navigate complex procedures for real estate acquisitions. Continue reading to discover more about real estate investment funds in India and their unique features.
How Do Real Estate Investment Trusts (REIT) Work?
A Real Estate Investment Trust (REIT) is a widely utilised financial instrument in numerous countries, particularly in the United States where it originated. In India, REITs were introduced only a few years ago and have not yet emerged as a primary investment vehicle. The infrastructure required to establish this tool as a secure and accessible option is still in the process of development.
REITs operate on a mutual fund model. Investors, known as unit holders, purchase units in a fund and gain access to the asset portfolio, sharing in the total profits. While mutual funds can invest in various financial instruments like stocks and bonds, REITs are distinct due to their primary focus on real estate. These funds allow investors to generate income from real estate assets, including residential complexes, office buildings, warehouses, and shopping centres, without the need for direct ownership. This system enables individual investors to participate in large property investments with modest funds, alleviating concerns about complex purchase procedures.
Experts anticipate a growth in the number of such funds in India. According to a study by Crisil market research, the Indian real estate market is projected to achieve an average annual growth rate of 11% between 2020 and 2025. This market expansion, coupled with the growing awareness of REITs, has attracted new funds into the market.
In April 2023, NSE Indices Limited, a subsidiary of the National Stock Exchange, introduced India's inaugural real estate and infrastructure investment trust index, known as the Nifty REITs & InvITs Index. The launch of this index has garnered attention and interest in real estate stocks in India, potentially leading to an increased flow of funds from mutual funds into real estate trusts.
As of 2023, India has registered four trusts, comprising three focused on office real estate (Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust) and one dedicated to retail real estate (Nexus Select). In September 2023, the Indian REITs Association was officially established under the oversight of the Securities and Exchange Board. By that time, the number of unit holders had grown to 200,000, reflecting the stability and attractiveness of investment returns.
Apollo Bandar, Colaba, Mumbai, Maharashtra. Photo: Dean David (Unsplash)
REIT Pros and Cons
Similar to any other financial instrument, REITs have their unique characteristics. There are several reasons why investors opt to invest in them:
- REITs are perfect for long-term investments.
- There is no need to go through complicated procedures of selecting and purchasing real estate. The investor relies on the reputation of the fund. This is why the introduction of a real estate investment trust index is so important; it has become easier to choose a fund.
- You can invest even with a modest amount of capital. In contrast, independent investments would require you to accumulate a substantial sum and purchase a property entirely on your own.
- Investors enjoy diversification as funds typically allocate investments across multiple property types, ideally encompassing residential real estate, office spaces, warehouses, and hotels. However, collective investment funds in India still tend to concentrate on specific segments.
- REITs are required to allocate 80% of their portfolio to income-generating real estate and distribute 90% of the profits to investors, ensuring them a reliable source of income
While considering these aspects, it's important to recognize that the performance of trusts is contingent on market conditions. Investors can expect assured returns in a growing market but may experience lacklustre performance during sluggish market phases. Moreover, the growth potential is inherently limited, and the income generated may not match that from direct real estate resale. Another drawback is the limited influence an investor has on the trust's decisions. Additionally, the trust may impose restrictions on unit sales for a specified period, which becomes critical in the event of a significant market downturn.
Mumbai. Photo: Ameya Khandekar (Unsplash)
Top Real Estate Funds in India
Embassy Office Parks REIT
This is India’s first publicly listed trust in India. It was launched by Embassy&Blackstone, which owns and manages six hotels, 12 office parks, and a solar power plant in Asia. The company has offices in Mumbai, Bangalore, and Delhi. The buildings in the company's portfolio are 87% occupied.
Mindspace Business Parks REIT
This trust is affiliated with the K Raheja Corp Group, established in 1956. The company boasts an extensive portfolio of office buildings across various cities, including Chennai, Hyderabad, Mumbai, Pune, among others, with an average occupancy rate of approximately 87%. The company's revenue has been steadily increasing at a rate of around 7% per year.
Brookfield India REIT
Brookfield India was founded in 2020. Its portfolio includes class A office buildings in Gurugram, Mumbai, Kolkata, Noida, and other cities in India.
Nexus Select REIT
This fund was listed in May 2023. The fund invests in 17 high-quality shopping centres located in densely populated areas of 14 major cities in India. The properties are approximately 96% occupied.
Other Real Estate Mutual Funds in India
In addition to international REITs, there are other mutual funds in India that are noteworthy. These are well-established players with extensive experience in the Indian real estate market.
- HDFC has been in existence since 1999 and boasts a robust portfolio of properties at competitive prices.
- Kotak Private Equity was established in 2008 and has invested in 40 large projects since then.
- SBI. This fund was established in 2014 and focuses mainly on residential real estate.
REIT Income Taxation
Investments in real estate funds in India are subject to taxation as an income-generating instrument. The tax scale is as follows:
- 15% tax on capital gains from the sale of Indian REITs, if held for less than one year.
- 10% tax on capital gains from the sale of REITs, if held for more than 36 months.
In a Nutshell
Real estate mutual funds in India are gaining popularity and evolving into efficient investment tools. Over the next 18 months, experts anticipate a significant increase in interest in these funds, both from retail investors and major players. The primary advantage of these funds, a highly diversified portfolio, ensures stable returns. In India, there are office and retail real estate investment trusts where investors can efficiently participate in the growing market.
