Understanding REITs and Mindspace IPO

Understanding REITs and Mindspace IPO

Mindspace Business Parks Real Estate Investment Trust (REIT) announced to go public to raise a sum of ₹4,500 crores – the IPO closed on 29th July. Till now Embassy Office Parks was India’s only listed REIT. The concept of REIT was introduced in 2007 by the Securities and Exchange Board of India (SEBI). Before investing it is important to know what REITs mean and how do they function? Let’s understand it.

Crux of the Matter

What Are REITs?
There are plenty of investment options like gold, government bond, equity, debt, real estate, commodities, etc. Generally, real estate investment requires large sums of money to be invested for a long period of time – 5-10 years or more. The bottleneck with such investment is that if in times of need someone wants to sell this investment, it is not likely that it would be sold quickly and without incurring price reduction. So investors’ money remains blocked for a long time. However, REITs make real estate investment more liquid and affordable.

REITs were first introduced in the US in 1960. A REIT is a company that owns, operates, or finances income-generating real estate. REITs pool units of a portfolio of real estate assets and allow investors to invest in parts of it through stock or share in the portfolio. REITs’ stock derives value from its underlying asset, real estate.

What is Equity REIT?

  • Let’s say ABC owns 5 commercial office spaces in Bengaluru.
  • XYZ is a REIT that buys these properties from ABC.
  • For investors investing in XYZ’s REIT, their stock derives value from the value of the underlying asset, here ABC’s 5 commercial spaces in Bengaluru.
  • XYZ earns through the rent received and thus pays REITs dividends from it.
  • XYZ would be categorized as an equity REIT.

What is Mortgage REIT?

  • ABC owns 5 commercial office spaces in Bengaluru.
  • XYZ is a REIT that gave a loan to ABC to develop these spaces.
  • For investors investing in XYZ’s REIT, their stock derives value from the value of an underlying asset, here the performance of the loan given to ABC
  • XYZ earns through the interest received on loan and thus pays REITs dividend from it
  • XYZ would be categorized as a mortgage REIT

REITs in India
Investors get benefits from REIT as it is obliged to return a certain portion of the money back on a yearly basis to investors. More importantly, REITs’ dividends are not taxed in India. An investor gets a share in the profit earned through real estate investment. The minimum subscription limit to invest in REITs has been reduced from ₹2 lakh to ₹50,000.

Ending Note On Mindspace
Mindspace is raising money for the underlying asset of Business Parks in India. Experts say that at a time when Work From Home is becoming the new normal life due to Covid-19, Mindspace IPO is a wrong offer at the wrong time. However, the IPO was oversubscribed 13 times. Experts say it could be because investors demand such products for diversifying their portfolio.

  • The Irvine Company, LLC. is an American private company focused on real estate development. Its owner, Donald Bren, is the wealthiest real estate developer in the United States, with a net worth of more than $15 billion.
  • REITs were created in the United States after President Dwight D. Eisenhower signed Public Law 86-779, sometimes called the Cigar Excise Tax Extension of 1960. The first REIT was American Realty Trust founded by Thomas J. Broyhill, cousin of Virginia U.S. Congressmen Joel Broyhill in 1961.
  • A real estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets and typically follows a land boom. A land boom is a rapid increase in the market price of real property such as housing until they reach unsustainable levels and then decline.