Studying REITs

24th May 2022

What is a REIT ?
• Unique Tax Structure – REITs DO NOT pay CORPORATE TAX (if they
distribute 90% of taxable income as dividends) – Check if true in India

• REITs own property through

• Lease hold interest / Ground Lease – they lease the land for several decades
• Fee simple interest – Own the Title of Land

• REITs use DEBT to finance a part of their Purchase of Land

• Mortgage (property level debt)
• Corporate Bonds (unsecured Debt)
• Index inclusion is a significant factor in long-term REIT performance
• REITs that are included in S&P 500 or Nifty will tend to outperform non-listed
or non-index REITs due to high visibility to money managers
• Index REITs also experience disproportionate declines (temporary) when
public does not want to own them

• REIT’s ability to increase Shareholder Value depend on

• Competency and discipline of Senior Management and Property Management
teams
Growth Tactics
• Internal / Organic Growth – managing assets it ALREADY OWNS
• External Growth – Acquiring or developing properties

• Financing the growth by

• Issuing New Equity or Debt
• Selling Properties
Cost of Capital
• Each company’s Cost of Capital affects the opportunities on which the
management can capitalize

Companies with Lower Cost of Capital are able to grow faster and with higher
quality investments than companies with higher, less competitive costs of capital
Benefits to Unit Holders / Investors
Direct Commercial Real Estate
• No Indexation benefit on Capital Gains
• Capital Gains calculated as Sell Price – Buy Price
• Illiquid – its not easy to sell a commercial office /
shop – no ready market
Fixed Deposits
REIT Investments
• Indexation benefit on Capital Gains if
units held for more than 3 years
• Liquid / Can sell anytime and
partially also
• Transaction cost low – trading cost
only
REIT Investments
• Rent income is not taxed, it is taxable
in the hands of the Unit Holder only
– so
What is a REIT ?