Let's say I am a RE developer, K Raheja. I am interested in some land in Mumbai & Hyderabad for some commercial development. I decided to buy it. Where will I get the money to buy and construct it?

1. Self
2. Bank, NBFC, MF - Debt
3. Partner – someone else investing as Equity

So I invested some money, got some from banks & MF and I also got Blackrock to invest to buy the land and make a business park called 'Mindspace'. I constructed around 23-mn sq ft with multiple building and I started leasing them out to companies who wanted rented office premises.

There comes a point where I need more money to build a new building, pay off the loans etc., where do I get the money? So I decide to do an #IPO. Not of my entire company but only this project called Mindspace. So I formed a trust or corporation. I commit to payout 90% of my rent income to the shareholders proportionately as dividends and I will use this IPO money to invest a minimum 80% in completed real estate, which is generating rent & will use 20% in constructing new Real Estate or lend to some other developer.

Is the IPO a win-win?
(a) K Raheja gets more money to pay off debt, investment in more commercial real estate
(b) Investors will receive dividends semi-annually (from the rent income) which is tax free. As it is listed on the exchange the stock prices can go up

Why will the stock price go up?
(a) Rents increase year after year
(b) The value of the land increases
(c) New construction means more business

Why invest in a REIT?
(a) G-Sec is at 6% and the rent yield in commercial RE is roughly 7% - 7.5%
(b) Diversification – It’s a combination of Debt (rental income) & Equity (listed in exchange and stock price can move up)
(c) Investment in RE with just 50K

What is the tax structure 2 the investor?
There are 3 types of income.
(a) Rent–Tax-free
(b) Interest – REIT’s can also loan money to another developer and receive interest. If you receive interest from the REIT, It will be taxed at the slab rate. Practically this is very less or zero
(c) Capital Gain on the stock exchange – 15% Short Term Capital Gains Tax if you sell the REIT before 1 year and 10% Long Term Capital Gains Tax if you sell the REIT units after 1 year.

What to look for before investing in a REIT?
(a) Weighted Average Lease Expiry – Higher the better
(b) Vacancy Rate – Lower the better
(c) Concentration of top 10 tenants – Lower the better
(d) Sector Concentration – Lower the better