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  • Writer's pictureAnushka Trivedi

Investing 2023: Softening Inflation can Boost REITs Returns


Spiking inflation rates have given several setbacks in the country, and investing avenues are the significant ones. Some of the instruments have performed well like gold, debt instruments, FDs, and deposits, while others wiped out huge amounts of capital, like stocks of the startups like Paytm.


Various investment avenues are prevailing in the market, from stocks to commodities, but India's favorite will always be FDs and real estate. We can talk about FDs later. Let's discuss real estate today to understand why real estate investing is highly unaffordable, what are the expectations of buyers & sellers and why REITs are giving heart attacks to investors.


2 ways Investing in Real Estate

First things first, there are mainly two methods through which you can invest in real estate: Physical property,

REITs




We all are well known about the process of owning a property whether it is a pre-constructed house or land.


REITs are an emerging way of investing in real estate, as you proportionately own a property through a real estate managing company. Say, you want to invest in a rental property but you do not have enough corpus to invest in, and such an asset costs Rs 1 crore. A real estate managing company pools money from various investors, like you, in smaller amounts and invests in such a property. You will be able to get yield proportionately.


This is how you can invest in real estate with a starting capital of Rs 10,000. Before 2021 such minimum capital requirement was Rs 50,000, which restricted the investor to invest in.


How have these REITs performed?

When it comes to the performance of instruments other than traditional ones like FDs, debt instruments, and fixed-income instruments, every other security has given less unattractive returns.


Let’s have a look at all the listed REITs’ performance:

  • Embassy fell from 8.2% in March 2019 to 6.4% in Jan 2023

  • Mindspace fell from 7.3% in August 2020 to 5.7% in Jan 2023

  • Brookfield fell from 7.9% in February 2021 to 7% in Jan 2023


Note
Data from the day these REITs have launched. 


Why have REITs given negative returns in 2022?


The primary reason for the declining returns of REITs is measures taken by the RBI to curb inflation in the country.


Yes!! RBI has increased repo rates and CRR requirements consequently banks have also hiked their interest rates on loans. With the effect of the same, debt instruments and other fixed-income securities became attractive and seemed safer than speculative ones.


Investors take an exit from the speculative securities market and start investing in fixed-income instruments like debt.


Note
Repo rate means the rate at which RBI gives loans to commercial banks in the case of a shortage of funds, which leaves the bank with less liquidity than earlier as they have to pay more interest to RBI than before.

CRR or cash reserve ratio means a ratio at which banks have to deposit a particular amount of money with RBI from their total deposits.


Will REITs be an attractive investment in 2023?


Retail inflation for December 2022 eases down to 5.72% which is a sign of recovery in the country. Now, the union budget will play an important role in the financial status of the country and further RBI monetary decisions.

Housing sector expectations from the union budget of cutting down the GST rate of steel and cement from 18% and 28% respectively, REITs might become an attractive investment again in 2023.

Since REITs only deal with the commercial sector of real estate, the raw material required in the construction of commercial buildings, cement, will ease the burden on the developers. It will reduce the entry barrier in the industry named GST.

REIT returns majorly depend on two factors, GST rates on raw materials and inflation status in the country.


So, we can say that inflation and REIT have an inverse relationship. If inflation rises, REITs' performance will go down, and vice versa.

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