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Real Estate Investment Trusts (REITs) with an Indian Perspective

Posted in Finance Articles, Total Reads: 1718 , Published on May 01, 2016

The investments in our country have primarily being into physical Gold or jewellery, and then came the awareness of capital markets. Yet the retail investors were still wary of the investments due to the huge volatility which comes along, being a zero sum game. But now after the introduction of REITs in September 2014, Indians have another safe option to invest in and take a pie in the burgeoning Real Estate market of the country. And the returns in last two decades have been stupendous.

Looking at the current situation, Indian market is bound to grow and the demand for the housing sector is bound to rise at a rate faster than ever. The overall growth of the economy, the initiatives by the govt in providing boost leading to increasing needs with the increase in purchasing power of the youth makes it a real in the near horizon. What makes this dream real is the check by Govt & our judicial system. Not only the REITs regulations 2014, but also the recently passed Real Estate Bill 2016, the due diligence carried out by banks before providing the loans to the builders, have all worked in favour of Indian economy and the sector, otherwise we could see the similar thing like the “Ghost cities of China” leading to total collapse of the real estate. Although we still stand at a lot of inventory in Delhi/NCR region but the things are improving for the better because the banks had learnt from their mistakes much earlier than anticipated. So that brings us to the overall scenario of sector we wish to invest in.

Image: pixabay

What are REITs & what is the structure of REITs?

REITs have been an investment tool in developed economies for several years now and provide a stable investment alternative for small or retail investors, as well as good source of funds for the real estate developers. The Indian REIT regime is similar to the internationally followed rules and guidelines and somewhat much investor friendly.


The India REITs regime delivers:

• An organised market for retail investors to invest and be part of the Indian Real Estate growth story.

• A professionally managed ecosystem that is risk averse and is aimed at protecting the interest of public.

• An exit platform for the real estate sector to ease out liquidity burden.


The key commercial & legal highlights of the Indian REIT regime are as follows.

• Minimum asset size to be 500crores, out of which initial offer could be only minimum 250crores, which makes the Trustees, sponsors, etc as 50% stake holders.

• Minimum 200 subscribers to form a REIT.

• Mandatorily listed on registered Stock Exchanges in the country.

• Little free cash flow left out of the profits leave very less margin for the loopholes to be cracked by the management thereby lessening the burden for the market watchdogs. Compulsory 90% distribution of the free cash flows biannually makes it favourite amongst the retail investors. Mandatory distribution of 90% of sale proceeds from the sale of assets to the unit holders.

• Declaration of Net Asset Value (NAV) within 15 days of valuation/updation.

• All assets to be in India, no foreign asset can be a part of the REIT under consideration.

• Any land or any attachments. Eg. – Building, sheds, car parks, etc.

• Not a part of Asset – Hospitals, Hotels costing more than 200crores, 3-star hotel located outside the city with population less than 10 lakhs. SEZ common infrastructures.

• Mortgage not available to the REIT assets

• 80% of investment to be made in income/rent generating properties, which means constant flow of cash.

• REITs to invest in 2 projects and none can have exposure more than 60% of total investment.

• Minimum unit size is 1lakh but the minimum subscription size of 2lakhs/2 units. Additionally all unit holders get the equal voting rights.

• The profits are dividend tax exempted but the individual investors will be taxed according to marginal tax rate applicable on the individual. Capital Gains are applicable according to the tenure the units are held. Long term – exempt & short term – 15% on the Capital gains.

It is one thing to know the benefits about the Investment scheme and another to value that investment properly and to earn profits; you need to know how to calculate the NPV of the investment tool.

NAV-based Pricing Model serves as the pillar of our selection process i.e., it identifies the REITs that are most/least attractively valued.

Valuation Components of NAV are as follows:-

1. Premiums ascribed to other equivalent REITs

2. Franchise value

3. Balance Sheet risk

4. Corporate Governance

5. Overhead (General & Administrative Expenses)


Firstly we should convert the balance sheet of a REIT to mark-to-market, so as to get the true picture of the NAV, below is the balance sheet comparison in Book value & Market value of the REIT. But first let’s see the valuation using the Operating Income (Funds from Operations). This measure generally comes from Cash flow statement


Value (INR)

Net Income (from income statement)




Gain (Deductible) from sale of assets


Capex (deductible)




Adjusted Funds from Operations (AFFO)



After the FFP or AFFO, we need the Capitalization rate; by this we mean the growth numbers. We can look into these numbers by valuing a similar property, the rent prospects, the occupancy rate in those buildings, the systematic risk & etc.

Let’s suppose the Cap. Rate is 7% then the AFFO is divided by cap rate to get the price of REIT. Other way round is if we know the price of REIT (analogous to market cap) we calculate the AFFO yield, by simply dividing the AFFO by price. The comparison of the numbers gives us the wisdom whether our investment is a good option or not.


The other way to do so is using the Balance sheet method or the NAV method.


Book Value (INR)

Market Value (INR)


Operating real estate



Construction under progress



Land Value



Equity in unconsolidated JVs



Value of fee business (Other income)



Other Assets



Total Assets






Preferred Stock



Equity in unconsolidated JVs



Shareholder Equity (No. Of fully diluted Shares – 2,00,000)







We can see the Joint Ventures (JVs) done by the REITs is under stress. The valuation can be very difficult and these numbers are just for reference. Even if we remove these numbers we can see the other factors are good enough to reflect the true NAV of the unit of REIT we would like to buy.


To succeed in the financial markets we need to be good with numbers and should be able to look carefully into the source of the numbers claimed by the companies. The introduction of REITs in India will definitely lead to better investment opportunities for all the stakeholders and will also improve the broken balance sheets of Indian banks.


This article has been authored by Rakshit Joshi from IIM Kashipur


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