Emerging trends indicate REIT a bright investment bet

A shift in the Indian household savings behaviour, falling yields and strong office market fundamentals make real estate investment trusts (REITs) a bright asset class for investment, JM Financial Institutional Securities has said.

In a recent report, the brokerage firm shows the best performing class fiscal year-to-date (FYTD) has been the listed Embassy REIT, as the trend of returns on various asset classes, including equity, debt, gold, REITs, real estate, is indicating a shift.

Falling yields is one of the reasons for the recent outperformance of Embassy REIT compared to the other asset classes.

Strong office market fundamentals were also expected to provide a steady earnings trajectory to REITs, the brokerage said.

“The underlying office space has been growing at 18 percent CAGR in the area over the last 19 years along with rent escalations, which are generally 5 percent every year. Besides, REITs would become a key source of funding for Indian real estate players going forward,” said JM Financial.Chart 2There is a shift in the trend in household savings as well.

Generally in India, an average Indian household holds 77 percent of its wealth in real estate and only 5 percent in financial assets. However, the rising acceptability of financial assets is emerging.

“We have seen, over the last few years, higher acceptability of financial assets as a savings tool in India,” said JM Financial.

This shift is expected to make REITs a bright asset class as they combine the benefits of real-estate investing with financial instruments offering investors an attractive opportunity.

“With higher acceptability of financial products and a natural inclination towards physical assets, a REIT would be a uniquely positioned product in India. REIT is an instrument that closely tracks the real-estate asset class and has the benefit of higher liquidity, well-discovered pricing and professionally managed assets,” JM Financial said.

“We still have one of the lowest rental rates, office space and capital values and the highest cap rates across major global cities. We believe the demand for Grade A commercial real estate remains a secular trend and REITs offer the best way to play the theme.”

REIT is a new entrant in the Indian financial system. India’s first real estate investment trust, Embassy REIT, was listed in March 2019. While it is early to generalise the success of a REIT, the fact remains that REITs will be a key investment theme in the coming years.

“On a pre-tax basis, with a 38 percent return, the Embassy REIT has outperformed other major asset classes FYTD, followed by Gold BeES which has given a return of 20 percent. The Nifty50 has been almost flat in the financial year so far, while Nifty Midcap 100 has fallen 12 percent. G-Sec has risen about 3 percent in this financial year so far,” said JM Financial.

However, over a three-year period, the Nifty has come out as the best, giving a return of 39 percent, followed by G-Sec (24 percent) and commercial real estate (23 percent).

Over a five-year period, Nifty50, Nifty Midcap100 and commercial real estate have returned 60 percent, 57 percent and 58 percent, respectively, JM Financial said.

The worst performing asset class over three years has been Midcap equity and residential real estate and over five years, residential real estate.

Chart 1