Small And Medium REITs Will Have Different Risk Exposure For Investors

Real Estate Investment Trusts have now been present in India for quite some time and slowly, the number of such offerings have gone up. At the same time, there have also been efforts to expand the scope of REITs as the traditional REITs were considered as giving a narrow scope for investment.

The Securities and Exchange Board of India has come out with guidelines for small and medium REITs to expand the market for this asset. This will increase the scope of investment for investors in this sector. But one needs to understand the changed risk situation too.

A small and medium REIT, as the name suggests, is a smaller version of the traditional REIT, that is normally experienced by investors.

A traditional REIT invests in commercial properties and then the rent and any capital gains on the property is earned by the REIT, which is distributed to the investors. The size of an asset under a small and medium REIT has to be a minimum of Rs 50 crore and not more than Rs 500 crore and it has to invest at least 95% of its assets in completed and revenue generating assets. A small and medium REIT can, thus, consist of both commercial as well as residential properties. A traditional REIT normally has quite a few properties under its fold, but the number might be far lesser for a smaller and medium REIT. This will affect the manner and nature of operation of the small and medium REIT.

One of the key points of a REIT is the kind of return that the investor will earn.

Unlike other investments the expectations have to be for a steady kind of return, where the rent will determine the main part of the return, while capital gains might provide a bit of a bump at specific time intervals.

However, it has to be understood that the yields on residential properties is usually lower than the yield on commercial property. This makes it important to see the kind of residential properties that such a fund might actually include in their portfolio and the weight of such assets.

This will be the factor that will determine the final return for the investor.

Another factor that also needs to be considered is the risk of concentration within the portfolio. If the holdings are lesser in number, then it allows the REIT to take a concentrated bet and while this might be a strategy that can pay off when it clicks, there is also a downside to it. The risk will also increase for the investor and this needs to be taken into consideration. If there is a problem with any of the holdings, then the impact on the portfolio can be high and this means that only specific investors should consider such REITs as an option. While the minimum investment here is Rs 10 lakh in its initial offering, which would eliminate many small investors, only those who can bear such a higher amount of risk and are comfortable with it should consider such funds as an option.

Unlike a traditional REIT, where there is a single fund and every investor would get access to the same portfolio, the situation can turn out be different for a small and medium REIT. Here, a single fund can have multiple schemes within it, which gives exposure to different kinds of portfolio. Thus, there could be multiple options which the investor would have to choose from. This is good from the perspective of allowing the investor to take an exposure that would be suitable for them. However, it also increases the work of the investor because they need to take into consideration the various choices that are in front of them and the impact that this will have on their returns. The risk for the investor would also change, depending on where they are taking the exposure, so it will allow for choices in this regard.

Arnav Pandya is founder Moneyeduschool.