This is the third post in the series. In which I will cover the risk of investing in REITs/ InvITs.

You can refer the earlier post here-

What are REITs and InvITs

REITs and InvITs – Who gets what ?

This asset class has emerged in last few years in India, so as the time passes there will be new issues and risks will surface. But I will list down few of the risk factors which any investors should look at before making investment in this type of Asset class.

1) Title of the Asset in the Trust

As in case of all the real estate properties, title (i.e. ownership) of the property is the most important things to know. In the case of REITs and InvITs, these are regulated by SEBI so there is very less chance that the properties under the Trust will have title defects but its a tricky issue and there can be disputes on the title at later point of time as well.

So before making a decision to invest in REITs/ InvITs, do a bit of homework to figure out if there have been any claims on the title of the properties under the Trust. Google search along with management statements and reading of financials should give you a fair idea.

2) Quality of the Asset

If the asset is of good quality then it will given you good returns for a long period of time.

For an example, if you are investing in Embassy REIT and you realize that all or most the offices under the Trust are located in Tier 2 or 3 cities or oddly located in part of cities which are not well connected. Or the properties under the Trust are 20 years old and have leftover life of only 10 more years then it clearly indicates that quality issue.

3) Past track record of the Asset

Many time REITs/ InvITs are combination of the properties which are Functional (in use) + Newly completed properties + Under construction properties.

If the Trust has lot of new properties and under construction properties then you have no past track record to look at. You do not know whether the properties will be able to get tenants or will the tenants pay the right rent or if the properties are even right for the target consumers ?

So, it is always advisable to invest in the REITs/ InvITs which has atleast 50-60% of functional properties and rest can be the combination of 2 types.

4) Management quality

At the end of the day, if the business has good management quality then business will perform well else it will go down.

So, always look the credentials of the Manager and the Trustee.

If the builder is not becoming the manager of the Trust then its a red flag, because he has been running the property for a long period of time and knows each aspect of the business.

If the new manager is taking over the trust after couple of years, then the manager has to be from the same industry with the good track records of performance. You can get most of this information by spending some time on google.

Same is with Trustee, it cannot be some small time person/ institution with no track records or reputation in the market. It has to be person who has reputation to defend and credibility on which you can depend on.

5) Other macro factors

These are factors which no one has control-on but these do impact the business.

Two extreme scenarios, so that you can get the drift –

REIT -1, owns chains of Cinema halls like Inox or Adventure parks like Wonder La

REIT -2, owns offices in all the Tier 1 cities

InvITs -1, owns power lines which supply power in strategic important sector of the economy

Now, if the these are hit by Earthquake or Terrorist attack or Roits, then what do you think will have most chance of getting back to business at the earliest ?

All will be impacted but government will want to ensure that 1st power lines are up and running then the office spaces and last the adventure parks or the cinema halls.

Now, you understand fair bit of this asset class, so here are the links to few of the available options which you can explore and may decide to invest in –

Embassy REIT – https://www.moneycontrol.com/india/stockpricequote/construction-real-estate/embassyofficeparksreit/EOP

Mindspace REIT – https://www.moneycontrol.com/india/stockpricequote/construction-real-estate/mindspacebusinessparksreit/MBP02

Brookfeild REIT – https://www.moneycontrol.com/india/stockpricequote/construction-real-estate/brookfieldindiarealestatetrust/BIR

Powergrid InvIT – https://www.moneycontrol.com/india/stockpricequote/miscellaneous/powergridinfrastructureinvestmenttrust/PII04

IndiGrid InvIT – https://www.moneycontrol.com/india/stockpricequote/power-generationdistribution/indigridinvitfund/IIF01