Real Estate Investment Trusts (REITs) – Commercial vs Retail
Real Estate is the most preferred asset class of Indians. It represents a significant portion of wealth for many individuals in the country.
However, investors investing in real estate face issues of huge capital requirements at the time of buying, and liquidity issues at the time of selling.
Real Estate Investment Trusts (REITs) provide a solution to this problem.
Here is all you need to know about REITs.
What are REITs?
REITs, or Real Estate Investment Trusts, are very similar to mutual funds.
The fund manager collects money from individual investors and uses these funds to invest in various properties.
These properties generate income in the form of rent, which is then distributed back to the investors in the form of dividends.
A noteworthy aspect of REITs is that they are required by law to distribute at least 90% of their earnings as dividends. This makes it an attractive investment opportunity for investors seeking recurring income.
There are two types of REITs currently available in the market: Retail REITs and Commercial REITs.
Let’s explore each type in detail.
- RETAIL REITs
Retail REITs, as the name suggests, invest in the retail sector. Their portfolio majorly consists of shopping malls and retail outlets.
These assets are usually located in densely populated residential areas, aiming to attract foot traffic and consumer spending.
Publicly Listed REITs:Despite such a huge real estate market in our country, there were no publicly listed retail REITs until May 23, when Nexus Select Trust came up with an IPO.
It became the first publicly listed REIT that invested in the retail sector.
Since retail REITs invests in shopping malls and retail outlets, their tenants are majorly customer-facing businesses like departmental stores and entertainment houses.
Nexus REITs top customers include names like PVR Cinemas, ZARA, Reliance Trends, Shoppers Stop, etc.
- COMMERCIAL REITs
Nature:Commercial REITs on the other hand invest in commercial properties. Their portfolio majorly contains office spaces, hotels, and other commercial buildings.
These properties are generally found on the outskirts of cities, targeting business and corporate tenants..
- Publicly Listed REITs:
There are currently 3 publicly listed REITs available to investors.
- Mindspace, and
- Brookfield India.
Embassy was the first ever REIT to get listed on the stock exchange in Aug 2019. Mindspace and Brookfield India followed by coming with their IPOs in Aug 2020 and Feb 2021 respectively.
Commercial REITs majorly rent office space to corporates doing business in various sectors.
Commercial REITs have an edge over Retail REITs in terms of tenant diversification since the former can have tenants from various industries. Having a diversified tenant base mitigates the potential impact of a specific sectoral slowdown.
Despite this, the top clients in all three commercial REITs came from the technology service sector followed by the financial service sector.
Top customers of the REITs included names like JP Morgan, Wells Fargo, Google, Wipro, Accenture, etc.