Invest In Real Estate Without Buying Property : The Prudent Investor

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Would you believe me if I told you that there is an awesome way to take advantage of real estate investments without enduring the cumbersome process of land registration, paying property taxes, and numerous other hassles? 

Many of us would love to own real estate and live off the rent.

But can we go out and buy an office space in a high-rise tower or a showroom in a shopping mall? 

For many of us, investing in real estate (particularly commercial real estate) is simply out of reach due to the large ticket size. But what if we could pool our resources with other investors and invest in large-scale commercial real estate as a group? REITs allow us to do precisely that.

The full form of a REIT is a Real Estate Investment Trust. REITs are companies that own and manage a portfolio of real estate properties. REITs typically own and operate real estate properties such as residential units, shopping centers, malls, commercial office space, and hotels.

What is a REIT?
Source: Kotak Mutual Fund

Benefits of REITs

A major benefit of REITs is to allow investors like you and me to be able to invest in real estate assets that we otherwise wouldn’t be able to, individually.

Real estate investment trusts allow one to invest in commercial real estate property without actually buying and managing those properties themselves.

Real estate investment trusts, or REITs, can be fantastic ways to add both growth and income to your overall portfolio, while adding diversification at the same time.

How do Equity REITs earn money for their investors?

  1. They make the most money by collecting rent on the property they own.
  2. As the property values go up, the values of the shareholders’ investments grow too, and the commercial properties generate even more income.
  3. REITs make money through buying and selling properties.
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REITs available in India

Embassy Office Parks’ and Raheja group’s ‘Mindspace’ are the only two publicly traded real estate investment trusts in India. 

The REITs available in India are usually made up of a portfolio of commercial office buildings. For example, 64 percent of Embassy’s portfolio consists of office spaces in Bengaluru only. 

One of the largest consumers of office spaces is the IT and ITeS sector. Which has implemented various Work From Home policies, which could put pressure on rent. As the vaccine roll out will take a while to implement, corporates are continuing with WFH for the time being.

As the profitability of Indian REITs is heavily dependent on commercial properties, the near term outlook is not promising. The demand for office and commercial spaces is likely to reduce as many companies are extending Work From Home options; due to which revenues may take a hit.

I thought REITs were the solution to the Real Estate liquidity problem. If not Indian REITs then what is the solution?

Well, one could use mutual funds to invest in the stock market, the bond market and even gold. But there was no avenue to invest in Real Estate through mutual funds.

Until now, that is. Kotak MF is filling this void with its new fund: Kotak International REIT FoF. This fund will invest in ‘SMAM Asia REIT Sub Trust Fund, which is managed by Japanese Asset Management Company Sumitomo Mitsui DS.

The underlying REIT fund will invest in various listed REITs in countries including Singapore, Hong Kong, and Australia. The investment portfolio will be diversified comprising of residential, office, data centres, warehousing, retail, and hospitality real estate projects.

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Benefits of Kotak International REIT FoF

Diversification across real estate segments

The Indian REIT market today is not as developed as its peers in other countries. While the REITs here are largely in the commercial space, the basket of REITs in SMAM Asia REIT fund is well-diversified and earns rental income from a variety of sectors: industrial (34.3 percent), retail (23.7 percent), diversified (23 percent), storage (2.2 percent), healthcare (1.3 percent), and office (3.9 percent). This is particularly helpful as many working segments are working from home due the pandemic.

Geographic Diversification

The fund offers exposure of various REITs across the Asia Pacific Region. Dividend yields of REITs listed in this region are higher than those traded in developed markets. As per the AMC, dividend yields of REITs in Hong Kong, Singapore and Australia are 5.3 percent, 4.7 percent and 4.3 percent, respectively.

Liquidity

Unlike actual real estate property, the money invested can be liquidated easily and quickly. And since you’re investing in a portfolio of properties rather than a single building, you take on less financial risk.

Diversification

Investment in a REIT is a key consideration when constructing any equity or fixed-income portfolio. They provide greater diversification, potentially higher total returns and/or lower overall risk. Their ability to generate dividend income along with capital appreciation makes them an excellent counterbalance to stocks, bonds, and cash.

Forex Benefit

One can tap into appreciation of international currencies versus the Indian rupee by investing in this fund.

Though this is a NFO, it is not a new fund. Since this fund will be investing in an existing fund, the underlying fund’s performance since its inception in 2011 is given below. Please note that it assumes dividends to be reinvested and is not the returns of just the unit price. The data below is in rupees.

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The fund will also benefit from currency movement. Usually the rupee depreciates around 4-5% against major currencies, which in turn will boost the returns of the fund. Like any overseas fund, there is currency risk. If the Rupee appreciates against the underlying currencies, you suffer a loss, though the chances are low. Rupee is generally a depreciating entity against major global currencies.

Like any other investment sector, real estate has its pros and cons. It should, however, be considered for most investment portfolios, with real estate investment trusts (REITs) and real estate mutual funds viewed as the preferred vehicle of filling that allocation.

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