Real estate as an asset class has long been a mainstay in investor portfolios, large and small. While it has traditionally focused primarily on residential real estate, the turn of the century saw the introduction of another sub-asset class in the form of commercial real estate, which has become the go-to product for high net worth individuals (HNIs). Rental yields were much higher than residential real estate.
However, due to the large ticket size, the asset class has always been exclusive to HNIs or institutional investors. Over the past five years, the advent of technology platforms and the listing of real estate investment trusts (REITs) have made this asset class more accessible to the general public as the ticket sizes in which investors can invest have become smaller. To further foster the growth of this asset class, SEBI plans to introduce MSM REIT, a new way to invest in commercial real estate.Also read: MSM REIT: How SEBI's innovative move will change India's real estate investment landscape
What is a REIT? Why do we need an MSM REIT?
Simply put, a REIT owns a portfolio of commercial real estate, and investors can gain exposure to this portfolio by purchasing units in the REIT. Similar to investing in units of a mutual fund scheme, investors can gain exposure to the portfolio of assets owned by that scheme. REITs manage these properties, collect rent from tenants who occupy them, and then distribute it to investors.
Currently, India has four listed REITs, two sponsored by leading development companies Embassy REIT and Mindspace REIT and two sponsored by investment management companies Brookfield REIT and Nexus REIT . Each of these four REITs has a diversified portfolio of underlying real estate across Tier 1 and Tier 2 cities in India.
However, some investors want to gain exposure to a specific asset where they know the overall characteristics of the property, tenant, lease structure, yield profile, etc. This is where MSM REIT allows investors to make real estate-specific investments. Extending the example that a normal HE REIT is equivalent to owning units in a mutual fund scheme, MSM REIT can be considered as equivalent to owning shares in one company. This allows investors to create customized portfolios based on their own requirements, just as investors can create their own portfolio by selecting stocks from multiple stocks.Also read: Are real estate investors interested in subdivided properties? 3 experts share their insights
How can I find the right MSM REIT to invest in?
Investors should understand and extensively research the underlying assets held by MSM REITs. To help investors start their research, we have listed some parameters that investors should look for.
quality and location: These are perhaps the two most important characteristics, and investors should evaluate these before investing, as the best buildings in the best locations will have the best quality tenants. Therefore, it is important for investors to physically visit the asset so that they can check the quality of the asset and the surrounding micro-market.
Grade A properties are typically located in city centers or secondary business districts. Built by a Grade A developer with quality amenities, impressive lobbies, LEED or IGBC certification, and high ceiling heights. When investors are unable to physically visit, the location of the building and the quality of the developer and tenant (such as Fortune 1000 companies or India's top 100 companies) serve as good proxies for assessing quality and location. Masu.
Lease structure: In a typical commercial lease, the tenant is only locked in for a short period of the lease term (3-5 years), while the landlord is “locked in” for the entire lease term (5-15 years). During the lock-in period, the “locked-in” party cannot terminate the contract. Attractive MSM REITs are those with at least two to three years of remaining lock-in and at least five years of remaining lease term.
Additionally, it is important to understand who invested in the renovation. You should choose assets where facility adjustments are made by the tenant, as this increases tenant closeness and reduces the likelihood of tenants taking vacations.
Demand and supply dynamics: A quality asset with good tenants needs to be understood along with the expected demand and future supply in the location. If micro-markets are expected to have greater future supply relative to demand, this will put significant downward pressure on rents by increasing vacancy rates and giving tenants more bargaining power to renegotiate rents.
Therefore, investors should look for markets with vacancy rates below 10% and favorable supply and demand characteristics. Availability and supply/demand data is regularly published by research teams from leading IPCs (International Property Consultants) such as JLL, CBRE and Knight Frank, and is a good starting point for your research.
Management quality: MSM REIT's performance is significantly influenced by the quality of its management team. Poor decision making, inexperience, or ineffective property management can impact your bottom line. Therefore, investors are advised to invest in MSM REIT. MSM REIT's management team has a proven track record of investing in and selling assets.Also read: Real estate accounts for highest allocation of household savings in India: Report
Does MSM REIT require diversification?
As with any investment, diversification is important with MSM REITs. But from now on, diversification will be under the control of individual investors. We have suggested several ways investors can diversify.
Based on asset class: As the industry matures, we will see MSM REITs available across multiple asset classes such as office, retail, warehouse, industrial, and hospitality. Investors should be able to invest in all of these assets and benefit from appreciation in a particular asset. Asset classes within the cycle. For example, even regular he REITs are starting to see asset class diversification. His first three REITs to go public were Office, and his first retail REIT went public last year. We expect MSM REIT to follow a similar trend.
Based on geography: Another way to diversify is to invest in multiple cities and minimize city risk at the portfolio level. In fact, this risk also exists for some publicly traded REITs. For example, Embassy REIT has a large portion of its portfolio in Bangalore. This flexibility to diversify allows investors to choose markets with strong fundamentals, such as low vacancy rates and stable rent growth.
What risks are involved?
Like any financial investment, MSM REITs involve their own risks and investors should be aware of these risks before investing. Some important ones are listed below.
tenant: Given that MSM REIT has only one or a few tenants, there is always a risk that the tenant will vacate the property. To mitigate this, investors are advised to thoroughly research the market, tenants, and lease structures. Spreading across multiple MSM REITs reduces this risk over time, as it is unlikely that all tenants will leave at the same time.
interest rate: Like other yield-oriented products, MSM REITs are subject to potential interest rate risk. When interest rates rise, investors start expecting higher yields as safer investments like FDs and government bonds start offering higher returns. This leads to a fall in REIT prices as prices move inversely to yields.
Liquidity: MSM REIT will be listed on a stock exchange, making it more liquid compared to direct investments in real estate. However, when the market is under stress, MSM REIT units, like regular REITs, can be difficult to sell at the desired price. Investors can reduce this risk by allocating capital for the long term (4-5 years or more).
Comparison of MSM REIT and regular REIT
One thing to note is the difference in ticket size. The ticket size of a normal His REIT is only 1 unit (unit size is less than Rs 400), whereas the ticket size of MSM REIT is expected to be a minimum of Rs 400. 100,000 yen. This large ticket size is to ensure that investors carry out thorough research before investing, given the early stage of the industry. However, over time, the ticket size limit may be relaxed, similar to how the minimum ticket size for REITs was reduced from 1 rupee to 1 unit. 200,000 at first.
In conclusion, MSM REITs offer a unique opportunity to invest in rental-producing commercial assets. Minimum ticket sizes are reduced for investors who want to choose the assets and micro-markets in which to invest. Additionally, for developers and holders of institutional asset management companies, it is now possible to bring to market assets that were previously too small for regular REITs and too large for HNIs, thereby making them commercially viable. Real estate will receive a further boost.Kunal Moktan is the CEO and co-founder of Property Share.
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