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Real Estate investment Trusts (REITs) are creating initial impact, they are now “material”, and have quickly reckoned as a regular stock option investment instrument across the investor landscape in Asia Pacific and the Middle East over the last five years.

EHL advisory takes a look at the different models across the continent and spells out the pros & cons on the merit of these SPVs both from an investor stand point for Risk diversification and a Promoter capital generation segment perspective.

Right off the bat for an investor there are a few key advantages for a REIT option. Rent generating real estate being the foundation here, land value grows perpetually and therefore infinite terminal value (Land Leased assets obviously depreciate). The NPV thus is markedly higher even at prevalent discount rates. Establishing the “discount rate” is another matter altogether but the CAPM model will arrive at a fairly accurate reading specially when calculated in context for regions and submarkets .Obvious Geopolitical factors affect the growth rate for a REIT as for any market investment option however the silver lining so far is that the inflation rate which has adverse effects on stock surprisingly has a correlating consequence on a REIT. Investor sentiment is a key factor for this phenomenon simply because as currency devalues people reclaim greater faith in the traditional wealth units namely gold and real estate. The structure, which is the bricks and mortar part of the asset devalues over time but mitigated again through tax offsets which a REIT enjoys. So A REIT being a tangible asset has its first feather and a huge one at that, a markedly lower Beta / risk than stock in say an operating Co. or an IT / IP based stock.

Structural compliance by the regulatory bodies of REIT established countries govern with the mind-set of protecting investor interest first and foremost further lowering risk .The promoters cannot set the rules here so both short and long-term investors are set to gain. 90% of the income on an average has to be paid out as dividend in two tranches annually, this literally means that promoters cannot shore up capital within the trust as usually is the case with fast growing companies again leading to lower end taxation at the divestment stage because investor gets the returns periodically as dividends, as rental & interest income yield and does not shell out as much as the otherwise capital gains cuts eventually. Explained simply tax breaks offered by the governments here as a stimulus package to promote this vertical gives the added benefit for investors for rental yields are relatively untaxed , interest however is taxed at different slabs across the continent. Capital gains is treated as any other divestment but due to the regular dividend pay-out and low shore up capital by default the net tax is much lower. Therefore from an investor stand point a REIT should deliver above market returns assuming that the risk is the same against the market trend line where we know the risk being lower. The returns should in fact outperform the trend line by at least 50-75 basis points when we consider that most rental contracts have a built in increase of 5 % every 3 years or so. What will also boost this further is shift share and new tenancies.

The million dollar question than is that, “If REITs are so lucrative why do we not see more of them regularly”. In my opinion we will. The high capital required and the stringent regulatory compliances have caused barriers to entry for promoters & partners forcing there hand towards a cautious deliberate approach for now. The major players are in set up due diligence mode. Another factor is timing the market right, key to success for the promoters. We will see institutionalised real estate going concerns with an established pedigree emerge as the dominant players and there will be a merger & acquisition inflection point soon. The submarkets will consolidate under a few key players, trend wise regionally dominant developers with long term JVs with PE funds, for the simple reason that local knowledge and expertise is a significant advantage in the sector. What this also means is that borrowing will get relatively much cheaper bringing down cost of debt in the long run.

Whilst it is relatively early days for REITs in the region signs point that this model will grow, evolve over the next decade as the market matures. It’s here to stay!

Author

mehta

Sahdev Mehta Senior Consultant India

Sahdev is a commercial real estate and hospitality expert with over twenty years of experience in executive leadership roles with major international hospitality brands globally & blue chip Realty Propcos across south East Asia.

In his body of work he has successfully led multi-faceted high performing teams in top leadership roles across continents with responsibilities covering commercial performance, asset PNL yield, strategy, owner stake holder management, business development, liability management, valuations, transactions advisory and management & debt restructuring as a hotel & commercial RE turnaround expert.

Sahdev has led commercial performance management & operations for International hotel chains as a senior General Manager overseeing the entire project management scope and master planning for high value developments. He gives back to the industry as a mentor to budding executive leadership helping them grow and mature into the role.

A Harvard Business School alum and convocation speaker for the batch of 2017 Sahdev is a thought leader who frequently represents the industry contributing in leading forums across the region.

 

Areas of Focus

  • NPA turnaround & Liability Management
  • Capital Deployment & Advisory
  • Hotel Asset management
  • Valuations
  • Acquisition & Divestment Advisory
  • Project conceptualisation & master planning