Thread by @KirtanShahCFP

(Thread) Understanding Real Estate Investment Trust (REITs) – This is for education purpose and the story is made up to simplify the concept, don’t take it at face value (1/n)

Lets say I am a RE developer, K Raheja. I like a land in Mumbai & Hyderabad 4 some commercial development. I decide to buy it. Where will I get the monies 2 buy & construct it?
(1) Self
(2) Bank, NBFC, MF - Debt
(3) Partner – someone else investing as Equity (2/n)

So I invest some monies, got some 4m banks & MF’s & I also got Blackrock to invest 2 buy the land & make the business park called Mindspace. I constructed around 23-mn sq ft with multiple building & I started leasing them out to companies who wanted rented office premises (3/n)

There comes a point where I needed more monies to build new building (6.4 mn sq ft), pay off the loans etc., where do I get the monies? So I decide to do an IPO. Not of the entire company K Raheja but only this project called Mindspace. So I formed a trust or corporation (4/n)

I committed to payout 90% of my rent income to the shareholders proportionately as dividends & I will use this money to invest a minimum 80% in completed real estate, which is generating rent and will use 20% in constructing new Real Estate (5/n)

Is the IPO a win-win?
a. K Raheja gets more money 2 pay off debt, investment in more commercial real estate
b. Investors will receive dividends semi annually (from the rent income) which is tax free + as its listed on the exchange the stock prices can go up (6/n)

Why will the stock price go up?

(a) Rents increase year after year
(b) The value of the land increases
(c) New construction means more business (7/n)

Why invest in a REIT?
(a) G-Sec is at 6% and the rent yield in commercial RE is 7.5%-8%
(b) Diversification – It’s a combination of Debt (rent income) & Equity (listed so prices can move)
(c) Investment in RE with just 50K (8/n)

Tax Structure?
There are 3 types of income,
a. Rent–Tax-free
b. Interest – REIT’s can also loan money to another developer (maximum 20%) & receive interest. If u receive interest 4m the REIT, It will be taxed at the slab rate. Practically this is very less or zero (9/n)

(c) Capital Gain on the stock exchange – 15% Short Term Capital Gains Tax if you sell the REIT before 3 years and 10% Long Term Capital Gains Tax if you sell the REIT units after 3 years (10/n)

What to look for before investing in a REIT?

(a) Weighted Average Lease Expiry – Higher the better
(b) Vacancy Rate – Lower the better
(c) Concentration of top 10 tenants – Lower the better
(d) Sector Concentration – Lower the better (11/n)

REITs operate exactly like MF’s
(a) Sponsor – K Raheja and Blackstone
(b) Manager – K Raheja (receives AMC fees for managing the properties)
(c) Trustee

but

REITs and real estate mutual funds are not the same (End)