Now REIT stocks more accessible; should you buy?

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REIT (Real Estate Investment Trust) stocks have failed to meet Street expectations. Among three REITs listed in India, the maiden offering (Embassy Office Parks) has returned 4 per cent year-to-date. Mindspace Business Parks tanked 10 per cent YTD while Brookfield India that was listed on February 15 this year is down 2 per cent against its listing price.

This is even as real estate stocks such as Mahindra Lifespace, Sobha and Indiabulls Real Estate have rallied over 150%.

The REIT space is expected to attract renewed interest as the market regulator Sebi has allowed reducing the trading lot size of the listed REITs to a single unit from 200 now. The revised trading lot will be available from Wednesday. If the current market size of a REIT stock is Rs 300, one will have to shell out at least Rs 60,000 to buy one lot. From August 11 onwards investors can buy a single share of REIT, that is, the current market price on per share basis.

The minimum application amount in a REIT has also been reduced from Rs 50,000 to Rs 10,000-15,000 when a new IPO comes.

The Sebi move would perhaps make InvITs and REITs accessible to many retail investors who may want to diversify their portfolio and book profits from their stock portfolio; starting off with minimum Rs 10,000-15,000 investment now; they will be able to understand the benefits of REIT and would perhaps increased their allocation when they grow more confident of this relatively new product. Also, the timing seems right as more companies, especially PSUs like NHAI and some private players are expected to launch InvITs and REITs,” says Deepak Jasani, Head of Retail Research, HDFC Securities.

Should you invest in REITs?

Experts believe the medium-term outlook of the space remains clouded due to the shift to work-from-home culture. The fundamentals are strong for the long-term. Note that the three REITs operate in the office segment and have higher concentration to IT and tech-based companies.

“IT segment is much more open to adopt work-from-home or hybrid working model. A more aggressive stance on cost cutting measures, or higher-than-expected work from home arrangements by the IT sector would reduce the need for office space pose a down-side risk to the estimates of these REITs,” says HDFC Securities.

“Long term fundamentals for the office sector remain intact due to competitive cost advantage, sticky nature of MNC companies, availability of talent pool and affordable high quality office infrastructure,” he adds.

What works in favour of REIT stocks is the prospects of regular income. All REITs are mandated to distribute 90% of the rental income as dividends among investors. They tend to earn three types of income in REITs – i) dividend income, ii) interest income and iii) capital gains.

“REIT holders derive cash flows in the form of interest, debt repayment and dividend payments from owned assets which have differing cash flow profiles. The underlying assets in REITs which consist of offices, malls and hotels are perpetual in nature and carry an element of capital appreciation as well through escalation in rentals, addition of new assets and ramp up in occupancies,” explains Jasani.

Talking about these 3 REITs, Jasani adds that they offer growth in yields through a combination of contractual escalations, re-leasing premium and rentals from under-construction portfolio. “All the three REIT are offering reasonable dividend yield at current levels and would offer the necessary diversification benefits given the strong rally in the stock market. Although the near term outlook for Grade A office portfolio is clouded, the long term outlook continues to remain positive.”