MindSpace REITs IPO starts 27th July 2020, and will be open for subscription till 29th July, 2020.
We will discuss first the basic advantages & limitations of a REIT. This exercise will help us take a more informed decision to invest or not in the upcoming issue.
What is a REIT?
In very simple terms, a REIT (Real Estate Investment Trust) is like a mutual fund consisting of a group of properties instead of stocks.
Whatever they collect as Rent, it is compulsory for a REIT to pay out most of it (85-90%) as dividend to its holders in order to avoid tax penalties.
Liquidity in comparison with physical real estate
An investor can sell his/her REIT unit & get cash quickly which is not possible with physical real estate. You have to deal with a lot of formalities & legal issues to sell a property.
Generally physical real-estate make a huge part of the Net-worth of an individual. A lot of money gets blocked & one gets a huge exposure in one asset class.
BUT by investing in REIT you can limit your exposure to Real estate & diversify your assets properly. You also get Geographical Diversification of your assets.
3. Premium Properties
As an individual it is very difficult to buy posh properties, situated in the heart of the city like Malls etc. By investing in a REIT, you definitely can.
4. Predictable Earnings
One can expect to earn a certain amount of money every year, as rental income is fixed by contracts.
5. Tax Benefit
Post the changes in Finance Bill 2020, dividends received from REITs are not taxable in the hand of unit holders. Short-term capital Gains (STCG -Period less than 36 months) is 15% & Long-Term Capital Gains (LTCG-Period more than 36 month) is 10%.
1. Missing Tangiblity Aspect
You are a shareholder, not an owner of real estate. So, one cannot enjoy the property for living in.
2. Lack of control
You do not have any control on the property. It is somewhat similar in this aspect to the holiday time-share resorts, quite popular two decades ago.
3. Extreme Short-Term Volatility
The movement in prices of real estate is usually slow and stable. But the nature of REIT shares and their traceability on the stock exchange make it quite volatile in the short term.
4. Limited Growth Potential
There is a limited potential for growth unlike equities. On the other hand, risk is also less as REIT’s mostly invest in Class- A properties.
In order to keep leverage under control, a REIT may have to issue equity at very low price in adverse circumstances, which may lead to dilution of value for existing unit holders.
Technically, it is possible to sell REIT shares on the stock exchange, but only if there are buyers available at the time you wish to sell. It is akin to selling publicly-traded shares of a close-ended mutual fund.
THE BIGGER QUESTION
The bigger question that arises is “Is it advisable to invest in real estate, when rentals are dwindling and people are opting to work from home. Co-working spaces are seen as a business adversely impacted in the Covid19 economy. Large companies like TCS plan to let just 25% of their employees work from office. Employers and employees both have discovered a new way of life, and are likely to continue with the same.
If we wish to fall back on experience, the precedent to this issue is the Embassy REIT IPO in March, 2019 much before the Covid era. The ticket size was large (minimum investment of Rs. 2.4 lakhs for 800 units). SEBI has since decreased the ticket size to 200 units, bringing down the minimum investment for this IPO to Rs. 54000/-.
RECOMMENDATIONS FROM EXPERTS
There are some experts who recommend investing in this IPO for the following reasons:
- Dividends received from REITs are tax-free.
- Mindspace plans to utilise inflows from the IPO to repay debt. This might increase liquidity and yields in future.
- Rent collection during the last three months is 98%, showing the Covid impact as minimal.
- Strong balance sheet
- Blue-chip clients
Every individual’s net worth must have some exposure to Real Estate.
So, one can apply for long term & consistent returns higher than those offered by traditional instruments like FD etc. It also holds the scope of capital gain.
All liquidity needs should be met before investing in a REIT. 5-10% of an individual’s net worth except the property one is residing in, can be the quantum one chooses to invest in Real Estate (including REITs).
Prolonged continuation of the pandemic is a key risk to profitability of this business.
This is just my opinion based on information available in public realm, not an investment advice.
Other Details about the IPO
- Issue open- 27th to 29th July 2020
- Lot size- 200 units
- Price band of Units- Rs274- Rs275
- Min. Investment for 1 lot- Rs 55,000
How to apply?
Applications can be made through
- SBI Bank
- HDFC Bank
- ICICI Bank
- Kotak Bank
- Axis Bank
Detailed instructions are available on their websites.
Zerodha customers can apply online through netbanking.
See profile on https://www.moneygoalz.com/listing/yash-seth-2/