REIT vs Real estate investment

[slowbie]

I was evaluating investment option for REIT vs Real estate investment for ticket size of 75lakhs. I did cost benefit analysis for buying a 2BHK home on 15 year loan and putting its rental of 25k pm to index fund as monthly SIP. Assume we will get 12% appreciation for 15 yeas on this amount. Assume we get Rental yield ~3.5%

vs

Distributing 60lakhs as a SIP of 50K pm for next 11 years in 2 best reit funds. Assuming we get 12%* pa appreciation and 6% dividend yield which is again reinvested in buying more reit stocks and accumulating this for next 12 year.

Result of analysis.

Even with putting less money in REIT it will easily beat realestate investment in 12th year. And if holded beyond compunding will kick in and you will make multiple X of original investment of 60lakhs. This is purely due to 12 annual yield + 6% dividend yield effectively mean it will compound with ~18% YOY basis.

Have anyone though/tried this strategy ? hows their experience in investing in REIT's

-------------------------

*12% XIRR I had checked in US based REIT as indian REIT's are just under 3 year so no historical benchmark to compare.

UPDATE on 11th Sep 2023 : I have been investing in SIP mode in every fall and its in -8.7 % in red as on day.

As per my analysis BIRET might fall till Rs 220 where I will invest a major portion. ie 10% from CMP.

Embassy has made a nice base around Rs 300 and consolidating, lets see what happen next.

https://preview.redd.it/cjop7lemlkn...bp&s=a3ec475845a6b92b2571c565df607469f4e6d3af

 

[zashmaster]

@slowbie There may not be much to analyze here TBH. The two scenarios that you have mix a single property+equity on one hand and a collection of rent yielding properties on the other. Very different things.

In India, residential real estate is a POOR INVETMENT. It is as simple as that. Two major factors contribute to this. The rental yield - which is mostly

 

[slowbie]

@zashmaster Yes in metro city the rental yield is poor. Thats the reason to explore I was exploring the alternative.

 

[kenm]

@slowbie Lot of assumptions here about returns and dividend yields. You may or may not end up with these returns.

What you also need to consider is the possible tax benefits with a home loan and the tax outgo for REIT dividend income. If you are in the 30% slab then effective dividend is 4.2% on a 6% yield assumption.

I think the extra factors you need to compare are these.

1. Why are you investing in real estate? Is it to have a constant source of income or is it to diversify your holdings or is it to own a physical property?
2. If you want a constant source of income REITs are definitely better than a physical property. Your ticket size cannot buy you a good commercial property and commercial rental yields are better than residential yields.
3. If you want to diversify your investments you need to analyse the correlation between whatever you hold as your benchmark (let's say Nifty 50) and the REIT fund. If they are highly correlated you are hardly gaining any advantages of diversifying here. On top of that you must be ready to rebalance your portfolio to maintain your allocation %.
4. If you want a physical property that you want to go back to in case of emergencies REIT is out of question. But you get the extra headache of maintenance effort and costs, unruly tenants, and the likes.

So as they say choose your poison based on what poison you can digest.

 

[raf101]

@kenm Any recommendations on REITs?

 

[kenm]

@raf101 I don't directly invest in REIT, but via MFs.

Capital Mind has a bunch of articles detailing how to analyse them.

https://www.capitalmind.in/2022/05/best-reit-india/

https://www.capitalmind.in/2020/02/indian-investors-reit/

 

[paul_1965]

@kenm Can u please share REITs mutual fund that u are using?

 

[kenm]

@paul_1965 I invest in PPFAS Conservative Hybrid fund. Not a recommendation see if this suits your purpose before investing.

https://amc.ppfas.com/ppchf/

 

[paul_1965]

@kenm Thanks, I was looking for an index-like fund, which invests all reits

 

[fromgenesistorevelation]

@kenm 0-10% allocation in REIT is too low unfortunately unless you are planning to merge your debt and REIT investments into one with this fund.

 

[kenm]

@fromgenesistorevelation I agree. I have no explicit intention to invest in REITs. OP asked me for the MF I use.

I use this fund for the debt allocation of my portfolio.

 

[slowbie]

@kenm Yes ur right all these numbers are assumption based on past data, its not guarantee to produce these numbers. Thats why I had asked if anyone has experience investing in REIT's. This is also part of my Scuttlebutt to get real data from ppl. before taking the plunge ( by the way the two funds I am tracking EMBASSY and BIRET are all time low )

I am looking at REIT purely for purpose cashflow and I don't want to own a property and its problem of managing tenants, large ticket size and choosing location and right building ......

for point 3 u mentioned, REIT also has indexation benefit, which is not available with stock investment, This effectively increase the yield better.

 

[frank123]

@kenm Isn't Reit dividend tax free?

 

[kenm]

@frank123 Depends on the REIT. Some details here - https://economictimes.indiatimes.co...xation-how-to-redeem/articleshow/93066768.cms

 

[vivekanandshastri]

@slowbie you can invest in commercial property with strata

 

[slowbie]

@vivekanandshastri Have checked its recent project and found it to be similar to REITS. But ROI was less than 8% Direct commercial rental are around 9-10% pre-tax. I was uncomfortable on structure of management and governance of SVP and also the exit option. Other wise that was also a good option.

 

[esta]

@slowbie U didn't consider capital appreciation of the invested property ( i could only see rental yield and index investment appreciation).

 

[slowbie]

@esta I did mentioned in the result section, when compounding kicks in u will get multiples of your investment which also beats the capital appreciation ( CAGR of 5-6%).

 

[slowbie]

Update 9th Dec 2023: This week was there was lot of action in RIET space. Embasssy crashed and did smart recovery. Probably a weaker hand would have got stoploss and then there was a good on bounce from bottom by smart investor. Finally there was smart recovery this week with volume. Now the total loss is at 3%. during this period I added more of BIRET as valuation was lucrative.



https://preview.redd.it/urfj3634ga5...bp&s=a46d83556225ed92bfcc475a69a2f025df207d80

 

[follow_the_word]

@slowbie I see you do not have Mindspace. What is your view?