The real estate market has been one of the best-performing alternative investment sectors, as housing prices soared to record highs last year amid surging demand and limited supply. In December, the median price of a home sold reached $382,600, marking a 4.4% rise from the same month in 2022. This marks the sixth consecutive month of year-over-year price increases. Median home prices set a new record at $389,800 in 2023.
Given this backdrop, the real estate market is considered one of the best investment options. Real estate investment has long been heralded as a potent avenue for generating passive income, offering investors the opportunity to build wealth while minimizing active involvement.
What Are Real Estate Notes?
Real estate notes, also known as mortgage notes or promissory notes, represent the debt that is owed on a property. The mortgage note is a tradable asset, allowing the original lender to sell it to another party and transfer the right to collect payments.
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A real estate note is a legal document that outlines the terms and conditions of a loan used to purchase real estate. This financial instrument is a binding agreement between the borrower and the lender, detailing the amount borrowed, interest rate, repayment schedule and other relevant terms. Real estate notes provide a structured framework for the repayment of funds and establish the rights and responsibilities of both parties involved in the transaction.
One of the key benefits of real estate notes is the potential for passive income. Investors who hold real estate notes can enjoy a consistent cash flow without the day-to-day responsibilities of property management. Additionally, the fixed and predictable nature of payments outlined in the note provides a level of financial stability, making it an appealing option for those seeking a more secure investment avenue.
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How To Invest In Real Estate Notes
Real estate notes can be purchased from banks and other financial institutions as well as crowdfunding platforms. While traditional mortgage notes sold by banking institutions have been popular among investors, crowdfunding platforms have been steadily gaining momentum as they offer relatively higher returns.
Connect Invest is a popular crowdfunding platform that specializes in short-term real estate notes spanning from six to 24 months. Connect Invest’s average yields range from 7.5% to 9% and have a minimum investment requirement of $500. Connect Invest’s default rate stands at 1.93% for over 1,200 funded loans, significantly lower than the default rate of 5.2% on U.S. commercial real estate loans.
Real Estate Notes Vs. REITs: Which Are Better?
Unlike real estate notes, which are primarily a debt instrument, real estate investment trusts (REIT) investments involve the purchase of equity shares of publicly traded companies. REITs own, operate or finance income-generating real estate across various sectors.
Investors in REITs receive dividends based on the income generated by the underlying real estate properties, offering a way to participate in real estate markets without the need for direct property ownership. Real estate notes pay out interest payments on mortgage loans.
For instance, Arbor Realty Trust Inc. (NYSE:ABR), one of the largest real estate investment trusts in the U.S., pays $1.72 in dividends annually, yielding 12.93% on the current share price.
While real estate notes involve investing in mortgages or deeds of trust offering a fixed return, REITs are investment vehicles that pool funds to invest in various real estate properties. REITs typically bear higher risk compared to real estate notes, but they offer higher returns.
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In a move to regulate the fractional ownership industry, the Securities and Exchange Board of India (Sebi) has issued regulations to amend the REIT Regulations 2014, to establish guidelines for creation of Small and Medium Real Estate Investment Trusts (SM REITs), the notification said.
The new regulations will be called Sebi (REIT) (Amendment) Regulations 2024, it said.
“In regulation 2, in sub-regulation (1), clause (zm) shall be substituted with the following, namely -”(zm) REIT” or “Real Estate Investment Trust” means a person that pools rupees fifty crores or more for the purpose of issuing units to at least two hundred investors so as to acquire and manage real estate asset (s) or property (ies) , that would entitle such investors to receive the income generated therefore without filing them the day -to-day control over the management and operation of such real estate asset (s) or property (ies),” the notification said.
This means that under the arrangement, an SM REIT will be permitted to gather funds starting from ₹50 crore by issuing units to a minimum of 200 investors that will be utilized for acquiring and managing real estate assets or properties.
Also Read: Have a crore to invest in a second home in Goa? Here’s what you should know
The amendments were approved by SEBI on November 25 last year.
This is also expected to open the doors to fractional ownership of rent yielding real estate assets, including uber-luxury second homes across the country.
Also Read: Have a crore to invest in a second home in Goa? Here’s what you should know
A REIT is a company that owns, operates, or provides financing for income-generating real estate properties.
They currently need to have an asset base of ₹500 crore. These pool funds from investors, directing them toward various commercial real estate ventures. They are similar to shares and are listed on stock exchanges.
There are only three office REITs in India – Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust.
Also Read: Commercial real estate market has the potential to increase REIT market size over 6 times: ICRA
Real estate as an asset class has long been a mainstay for investor portfolios, both small or large. While it has mostly been focused on residential real estate, the turn of the century brought in another sub-asset class in the form of commercial real estate, which became the go-to product for high net-worth individuals (HNIs), since the rental yields were far higher than residential real estate.
However, the large ticket size meant that the asset class was always exclusive to HNIs or institutional investors. Over the last half a decade, with the advent of tech platforms and listing of Real Estate Investment Trusts (REITs), this asset class has become more accessible to the general public due to smaller ticket sizes in which investors can invest. In order to further stimulate the growth of this asset class, SEBI plans to introduce MSM REITs – a new way to invest into commercial real estate.Also Read: MSM REITs: How SEBI’s game-changing move will transform India’s real estate investment landscape
What are REITs and why is there a need for MSM REITs?
In simple terms, REITs own a portfolio of commercial properties and investors can purchase units of REITs to gain exposure to this portfolio. Similar to investing in units of a mutual fund scheme, investors gain exposure to the portfolio of assets the scheme owns. REITs manage those properties and collect rentals from the tenants occupying them, which is further distributed to its investors.
Currently, there are four listed REITs in India, 2 sponsored by top developers namely Embassy REIT and Mindspace REIT and 2 sponsored by investment managers namely Brookfield REIT and Nexus REIT. Each of these 4 REITs have a diversified portfolio of underlying properties across Tier 1 and Tier 2 cities in India.
However, certain investors want to gain exposure to specific assets, where they know the entire characteristics like the property, tenant, lease structure, yield profile etc. This is where MSM REITs will enable investors to make property specific investments. Extending our example of regular REITs being equivalent to owning units of a mutual fund scheme, MSM REITs can be thought of as being equivalent to owning a share of a single company. It would allow investors to create their own customized portfolio based on their own unique requirements, just like investors can create their own portfolio by picking up shares in multiple stocks.Also Read: Are real estate investors keen on fractional real estate? 3 experts share insights
How can one find the right MSM REIT to invest in?
An investor should understand and research extensively the underlying asset held by a MSM REIT. To get an investor started on the research, have listed a few parameters which an investor should look for:
Quality and location: These two are arguably the most important features, which an investor needs to assess before investing as the best quality tenants occupy the best buildings in the best locations. Therefore, it is important to visit the asset physically, which enables the investor to ascertain the asset quality as well as the surrounding micro-market.
Grade A properties are usually located in Central or Secondary Business Districts of the city. They come with quality amenities, impressive lobbies, LEED or IGBC certification, high ceiling heights and are built by Grade A developers. In case an investor is unable to visit physically, the location of the building along with the quality of the developer and tenant (like Fortune 1000 or Indian top 100 companies) can serve as a good proxy to assess the quality and location.
Lease structure: In a typical commercial lease, the tenant has lock-in for only a small duration of the lease (3-5 years), while the landlord is ‘locked-in’ for the entire lease period (5-15 years). During the lock-in period, the party which is ‘locked-in’ can’t terminate the contract. An attractive MSM REIT would be one in which the remaining lock-in period is at least 2-3 years and the remaining lease period is at least 5 years.
Moreover, it is important to also understand who has invested in the fit-outs. One should prefer an asset where the fit-outs are done by the tenant, as that improves the stickiness of the tenant and reduces the chance of vacation by the tenant.
Demand/supply dynamics: A good quality asset with a good tenant, has to be understood along with the expected demand and upcoming supply in the location. When compared to the demand, if a micro-market sees a much larger upcoming supply, it pushes the vacancy higher, which puts a significantly downward pressure on the rentals as it gives the bargaining power to the tenants to renegotiate the rents.
Hence, an investor should look for markets which have a vacancy below 10% and favorable demand and supply characteristics. The vacancy and demand/supply data are published regularly by research teams of large IPCs (International Property Consultants) like JLL, CBRE and Knight Frank which can be a good starting point for research.
Management quality: The performance of a MSM REIT will be heavily influenced by the quality of its management team. Poor decision-making, lack of experience, or ineffective property management can impact returns. Therefore, an investor is advised to invest in a MSM REIT, whose management team has a proven track record in investing and exiting assets.Also Read: Real estate dominates Indian household savings with highest allocation: Report
Is diversification necessary in MSM REITs?
Just like in any other investment, diversification is important in MSM REITs as well. However, the diversification will now be under the control of individual investors. We have suggested a couple of ways in which an investor can diversify:
Based on asset class: As the industry matures, there will be MSM REITs available across multiple asset classes like office, retail, warehousing, industrial, hospitality, etc. An investor should be able to invest in assets across all of these and benefit from the upward movements of any particular asset class in a cycle. For example, we are beginning to see asset class diversification in regular REITs as well – the first three REITs to be listed were office, post which the first retail REIT got listed last year. MSM REIT can also be expected to follow a similar trend.
Based on geography: Another way to diversify would be investing across multiple cities and minimizing the city risk at a portfolio level. In fact, this risk is present in some of the listed REITs as well. For example, embassy REIT has a significant majority of its portfolio in Bangalore. Having this flexibility to diversify, would allow the investor to pick and choose markets with strong fundamentals like low vacancy and consistent rental growth.
What are the risks involved?
Like any other financial investment, the MSM REITs will come along with its own set of risks which an investor must be aware of before investing. Some important ones are listed below:
Tenancy: Given that the MSM REIT will have only a single or maybe a handful of tenants, the risk of the tenant vacating the property will always be there. To mitigate this, we recommend investors to conduct a thorough research about the market, tenant, as well as the lease structure. Diversifying across multiple MSM REITs will reduce this risk over time as it is unlikely that all of the tenants vacate at the same time.
Interest rate: Similar to any yield oriented product, MSM REITs also have an underlying interest rate risk. When interest rates go up, an investor would expect higher yield as safer investments like FDs and government bonds start offering higher returns. This leads to fall in REIT prices as prices move inversely to yields.
Liquidity: As MSM REITs are expected to be listed on stock exchanges, they will be much more liquid as compared to a direct real estate investment. However, in times of market stress, it may be challenging to sell MSM REIT units at a desired price, just like a regular REIT. Investors can mitigate this risk by allocating capital for the long term (over 4-5 years).
MSM REITs vs. Regular REITs
A key point to note is the difference in the ticket size. While regular REITs have a ticket size of only one unit (having unit size of less than Rs. 400), MSM REITs are expected to have a minimum ticket size of Rs. 10 lakhs. This large ticket size is to ensure that investors perform thorough research before investing given the nascent stage of the industry. However, as time progresses, the ticket size restriction may be relaxed, similar to the way minimum ticket size in REITs was reduced to one unit from Rs. 2 lakhs initially.
In conclusion, MSM REITs will present a unique opportunity to invest in rent generating commercial assets. For investors who want to choose the assets and micro-markets they invest in, it will reduce the minimum ticket size. Moreover, for the developers and holders of institutional asset managers, it will allow them to bring those assets to market, which were earlier too small for regular REITs and too big for HNIs, thereby providing further boost to commercial real estate.Kunal Moktan is CEO and Co-founder, Property Share.
Here’s your comprehensive 3-minute summary of all the things Finance Minister Nirmala Sitharaman said in her Budget speech: Click to download!
Denver, CO –News Direct– Select Sector SPDR
Since the announcement in 2015 of the Real Estate Sector ETF (XLRE), the sector has continued to evolve. This ETF is now more focused on REITs in the Industrial, Data Center and Telecommunications industries. XLRE is a unique investment platform that offers investors an easy and cost-effective way to access the overall Real Estate Investment Trust (REIT) market.
XLRE is a robust portfolio comprised of 31 REITs. Over 60% of the fund is held in the top ten holdings.
List of Top Holdings*:
ProLogis (12.56%)
American Tower A (9.03%)
Equinix Inc (8.45%)
Welltower (5.27%)
Simon Property A (5.00%)
Crown Castle (4.81%)
Public Storage (4.60%)
Realty Income (4.49%)
Digital Realty Trust (4.26%)
Costar Group (3.53%)
Designed with the goal of providing a diversified yet focused investment opportunity, the fund combines dividend yield with the potential for capital gains. With a low expense ratio of just 0.09%**, XLRE provides an affordable entry point into the various segments of the real estate market.
Moreover, the transparency of XLRE sets it apart from other ETFs. Investors are privy to daily disclosure of portfolio holdings and weightings, which provides them with a clear understanding of their investments.
For Your Consideration
As with all investment vehicles, it’s important for investors to be aware that ETFs are subject to certain risks, including loss of principal, sector risk, and non-diversification risk. Therefore, investors are encouraged to carefully consider investment objectives, risks, charges, and expenses before investing.
The S&P 500 Index, an unmanaged index of 500 common stocks widely considered representative of the U.S. stock market, serves as a benchmark for XLRE. This allows investors to align their investments with the broader market trends.
DISCLAIMER: This is a work of research and should not be taken as investment or financial advice. Therefore, Select Sector SPDRs or the publisher is not liable for any decision made based on the publication.
About the Company:
Select Sector SPDR ETFs offer flexibility and customization opportunities. Many investors have similar outlooks, but no two are exactly alike. Select Sector SPDR ETFs let investors select the sectors that best meet their investment goals.
*Holdings, Weightings & Assets as of 2/22/24 subject to change
**Ordinary brokerage fees apply
DISCLOSURES
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally considered representative of the U.S. stock market. The index is heavily weighted toward stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. The S&P 500 Index figures do not reflect any fees, expenses or taxes. An investor should consider investment objectives, risks, fees and expenses before investing.
One may not invest directly in an index.
Transparent ETFs provide daily disclosure of portfolio holdings and weightings
All ETFs are subject to risk, including loss of principal. Sector ETF products are also subject to sector risk and nondiversification risk, which generally will result in greater price fluctuations than the overall market. Diversification does not eliminate risk.
An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, which contains this and other information, call 1-866-SECTOR-ETF (732-8673) or visit www.sectorspdrs.com. Read the prospectus carefully before investing.
ALPS Portfolio Solutions Distributor, Inc., a registered broker-dealer, is distributor for the Select Sector SPDR Trust.
Media Contact:
Company: Select Sector SPDRs
Contact: Dan Dolan*
Address: 1290 Broadway, Suite 1000, Denver, CO 80203
Country: United States
Email: dan.dolan@sectorspdrs.com
Website: https://www.sectorspdrs.com/
*Dan Dolan is a Registered Representative of ALPS Portfolio Solutions Distributor, Inc. ALPS Portfolio Solutions Distributor, Inc., a registered broker-dealer, is the distributor for the Select Sector SPDR Trust.
SEL007312 EXP 4/30/24
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View source version on newsdirect.com: https://newsdirect.com/news/xlre-an-entrance-to-real-estate-investment-662282244
The Indian real estate sector is undergoing a monumental shift, with innovative models throwing open gates to an asset class confined to ultra HNIs and seasoned investors. As emerging alternatives like REITs, fractional ownership platforms and real estate crowdfunding disrupt traditional paradigms; they carve out a niche for millennials and first-time investors through lower entry barriers, steady returns and transparency.
The Rise of REITs
“In the face of escalating real estate prices per square foot, alternative investment avenues such as REITs, fractional ownership, and discounted bank-financed properties are emerging as robust options. Moreover, they introduce sachet-sized investment options, potentially enticing millennials to engage with real estate as an investment category,” says Sridhar Samudrala, Founder, Hecta.
REITs (real estate investment trusts) allow small-ticket investors to own fractions of income-generating real estate assets. Although new in India
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Data indicates over 700 million sq. ft. of grade A office stock in India is REIT-compliant, revealing immense potential for commercial REITs going forward. Moreover, experts believe the concept of smaller REITs is gaining traction. In the US, SMREITs (small-cap REITs) possessing real estate assets worth only $50-500 million flourish despite lower trading volumes.
Introducing SMREITS in India with a threshold of just ₹50 crore can draw increased retail participation in under-served niches like affordable housing. “The alternative route is known to offer substantial returns on low-cost investments,” affirmsHarish Fabiani, Chairman, IndiaLand Group.Clearly, REITs are reforming traditional realty investing across the risk-return spectrum.
Fractional Ownership
Options for co-investing in luxury properties are also expanding rapidly through fractional ownership platforms. By purchasing shares in hotel rooms, resort villas or office spaces starting from just ₹10-25 lakh, small-ticket investors can now own fractions of expensive assets earning high rental yields, which was earlier out of reach. Holding periods, returns on investment and occupancy guarantees vary across deals. Industry
Widening the Canvas
Vishal Raheja, Founder & MD, InvestoXpert.com, says, “In the dynamic landscape of real estate investment, exploring alternative vehicles such as REITs and crowdfunding opens new avenues for diversification. These alternatives offer flexibility, liquidity, and potential for attractive returns.”
Real estate crowdfunding platforms are fast emerging too – pooling micro-investments in vetted projects. Lower volatility versus equities, passive income potential and inflation-beating characteristics establish real estate as portfolio ballast. “Amidst the evolving landscape of real estate investment, investors are increasingly turning to alternative vehicles for diversification and opportunity,” informsMrinaal Mittal, Director, Unity Group.
Clearly, reimagining realty investment to accommodate diverse risk appetites and ticket sizes is transforming wealth creation pathways.
As technology
Commercial real estate (CRE) has long been an attractive investment avenue for those seeking to diversify their portfolios and capitalise on the stability and income potential of real property. Real Estate Investment Trusts (REITs) have been a game-changer in the global investment landscape, providing investors with a unique proposition to participate in the commercial real estate market. In a bid to catalyse the growth of the real estate sector in India, the Securities and Exchange Board of India (SEBI) has plans to introduce an innovative concept – the MSM REITs.
These MSM REITs, with a reduced minimum asset size of ₹25 crores, aim to foster a broader range of real estate investments while ensuring transparency, control, and credibility for investors. The minimum ticket size of Rs10 lakhs provides accessibility to retail investors while maintaining a certain level of sophistication.
This article explores the key features and advantages of MSM REITs, comparing them to traditional models and drawing parallels with global small-cap REITs.
Transparency, control and niche targeting
MSM REITs adopt a niche-targeted approach that allows investors to choose specific asset-focused schemes, offering transparency and control that goes beyond traditional blind pool investments. This provides investors with a clear understanding of the modalities and fundamentals of their investments ensuring a level of customisation and transparency that aligns with their evolving preferences.
Mandatory sponsor commitment and credibility
MSM REITs maintain the core structure of traditional REITs, comprising a Trustee, Sponsor/sponsor group, investment manager, and investors as primary stakeholders. Notably, in these MSM REITs, the Investment Manager and Sponsor can be the same entity. The proposed regulations ensure mandatory Sponsor commitment, fostering a ‘skin in the game’ mindset, and set minimum net worth requirements for the investment manager and sponsor, enhancing overall credibility.
Enhanced liquidity, easy transferability and low volatility
Listing units on stock exchanges introduce fair pricing, robust risk management, guaranteed settlement, high liquidity and easy transferability. Unlike the traditional models in the CRE investing space with long investment horizons, MSM REITs allow investors to exit at a time and price of their own choosing. Despite being a listed product, volatility remains low due to the backing of fairly stable assets.
Standardised regulations, risk mitigation and investor protection
The transition from the earlier models to a more structured approach in MSM REITs is a paradigm shift towards investor protection. Standardised regulations, Know Your Customer (KYC) norms, grievance redressal mechanisms, and the oversight of regulatory bodies collectively fortify investor confidence. The non-permissibility of investing in under-construction assets mitigates the risk of non-completion and disruption in returns. This prudent measure safeguards investors from uncertainties associated with projects still in progress, aligning with the aim of providing secure, stable and predictable returns.
In conclusion, incorporating MSM REITs into an investment portfolio offers investors a unique combination of stability, income generation, and growth potential. Drawing inspiration from global practices, the introduction of MSM REITs in India has the potential to mirror the success of small-cap REITs, single-asset REITs in other markets, such as the United States and the UK. This represents a progressive stride in the Indian real estate investment landscape.
By incorporating transparency, control, credibility, and investor protection, these REITs aim to stimulate further growth in the real estate sector and related segments of the economy. As India embraces this innovative approach, the MSM REITs have the potential to become a catalyst for a more inclusive and vibrant real estate investment ecosystem.
Abhishek Katiyar, VP of Strategic Initiatives at Property Share
Here’s your comprehensive 3-minute summary of all the things Finance Minister Nirmala Sitharaman said in her Budget speech: Click to download!