Opportunities in Real Estate in Nepal through REITs: Everything you need to know about why we need Real Estate Investment Trusts (REITs) in Nepal
AVISH ACHARYA
Group CFO @ F1Soft International || Banking | Fintech | Investments | M&A | Treasury Ex- Finance & Treasury Head, Laxmi Sunrise Bank
When you think of buying real estate, you probably think about the 'large capital' you would need to invest, the 'difficulty of finding a good property 'that is attractive yet underpriced, and also the legal and procedural 'hassles' of completing the purchase. Buying a commercial property the in mainstream capital requires even bigger investments. Liquidity is always a problem as selling a property may not always be easy.
The solution to all these problems: REIT. Here's a quick FAQ styled introduction to REITs. Please feel free to answer or share your insights on the comment section below.
What does REIT stand for?
REIT stands for Real Estate Investment Trust and enables you to buy real estate in the same way you could purchase mutual funds.
What is a REIT?
A real estate investment trust (REIT) is a company that buys and operates income-generating real estate, usually commercial - and not land or property that doesn't yield rent or other returns. The kind of real estate investments that drive growth of commercial property for industries, healthcare, hotels and others.
What is the business model of REIT?
The business model of a REIT is relatively simple. The company raises money from investors, buys properties, and then leases them out to tenants. The tenants pay rent, which generates income for the REIT. This income is then distributed to the shareholders in the form of dividends.
Why buy REITs instead of buying actual real estate?
Buying REITs will ensure you own real estate without the hassle of actually buying real estate in your own name. You will be able to earn from the income of real estate owned by the REIT without ever buying one yourself. It is a pool of funds similar to mutual funds.
You need not own a large amount of money to buy real estate, you may choose to invest a smaller amount in a REIT to benefit from income from real estate. In order to be considered a REIT, usually, the company must invest at least 80%-90% of its assets in real estate and derive at least 80%-90% of its revenues from real estate-related activities.
What kind of assets and real estate do REITS own?
A REIT is a company that owns and operates income-producing real estate properties like commercial buildings, hotels, apartments, shopping centers, malls, etc. REITs can also own loans and mortgages, and other infrastructures like data centers and warehouses.
What are the benefits of buying REITs?
- REITs can provide a strong and stable annual dividend
- There is potential of capital gain
- REITs are easy to buy and sell compared to buying actual real estate
- As a shareholder, you have the right to vote on major decisions affecting the REIT
- REITs often pay out high amounts of dividends.
- Buying REITs offer good diversification compared to other financial assets
- REIT companies globally are often exempt from income tax.
- Buying property directly has a lot of hassles. Investing through REITs will eliminate dealing with builders, brokers, documentation risks etc.
What are the downsides of buying REITs?
- Most income from REITs are stable and there is less room for capital appreciation.
- Most REITs must pay a sizable (usually 90%) income back to investors meaning re-investing profits isn’t possible
- REITs have high management and transaction fees. REIT dividends are often taxed higher.
- REITs are subject to market risk.
- Non-traded REITs are illiquid investments. They generally cannot be sold readily on the open market. If you need to sell an asset to raise money quickly, you may not be able to do so with shares of a non-traded REIT.
While the market price of a publicly-traded REIT is readily accessible, it can be difficult to determine the value of a share of a non-traded REIT. Non-traded REITs typically do not provide an estimate of their value per share until 18 months after their offering closes.
How much income do REITs distribute?
In most countries, REITs must pay out a large chunk of their profits as dividends. Mostly, REITs are required to pay out 90% or more of their taxable profits to shareholders in the form of dividends.
How are REITs similar to mutual funds?
REITs are similar to mutual funds in that they offer investors a way to diversify their risk by investing in a number of different properties and sectors. Like mutual funds, REITs are also traded on public markets, so you can sell your shares at any time if you need to access your capital.
How can REITs help in FDIs?
There are restrictions in bringing in FDI for real estate in Nepal. The reason is real estate investments are mostly considered to be only speculative and do not add to the GDP (unless value is created). REITs can bring in foreign currency and help build better commercial properties and boost economic activity.
When are benefits of REITs to builders?
Builders can approach REITs for their working capital requirement. REITs can prove as an alternative to bank loans for builders. REITs will also work as a financier for big real estate projects.
What are the different types of REITs?
There are a few different types of REITs, each with its own set of benefits and risks. The most common types are:
1. Equity REITs: These REITs invest in properties and then earn income from the rent that they collect. They are the most common type of REIT and are the riskiest since their profits are directly linked to the performance of the real estate market.
2. Mortgage REITs: These REITs invest in mortgages and earn income from the interest payments that they receive. They are less risky than equity REITs, but their profits are also less volatile.
3. Hybrid REITs: These REITs invest in both properties and mortgages, giving them a mix of the benefits and risks of both equity and mortgage REIT
Are REITs publicly traded?
Yes, but sometimes they may not be. Shares of publicly traded REITs are listed on a securities exchange and promise easy liquidity. Such shares can be easily purchased and sold. You can purchase these shares through a broker.
Do REITs develop real estate properties?
REITs do not develop properties to resell them. Rather, REITs buy real estate properties to develop them and earn income through these assets.
Should Nepal introduce REITs?
Yes, to formalize the investment in real estate. REITs are regulated and have sponsors and trustees. A listed REIT would be more transparent, and the fact that REITs can invest only in commercial real estate that yield returns, real estate investments through REITs would drive money towards more 'productive' investments in healthcare, hospitality and industries. REITs would also offer alternative investment opportunities to investors and attract FDI in Nepal.
Views are the author's own and do not represent the organization he represents.
Mobile Developer || Fintech || 6+ YoE in Mobile App Development || Flutter || React-Native || Swift || IOS || Android
7moGreat Article 👏
Chief Internal Audit & Business Intelligence Jawalakhel Group of Industries
1yThank you Avish for your articles in different financial topics, I really enjoy reading it and get chance to update myself through it. For this REIT, I have a different thought than yours. In Nepalese market where we are getting 10% on FDs, 10-11% on Govt. Bonds and 10-11% on Debentures (which are perceived to be the safest investment), what types of investors do you think would be interested on such REIT in Nepal? I don’t think that just for shake of diversification of one’s portfolio, one will invest in riskier assets that too with probability of lower yields considering the current land price scenario in Nepal.
Managing Director at Ayan Holidays Nepal , Former Safety Manager at Kailash Helicopter Services
1ybaburam nepal
SWE | CS & Math @ Bennington College '23
2yGood article but I for one believe that REITs would be a disaster for Nepal. Could be an overstatement but knowing how overvalued the real estate market is, REITs would only add to the problem. And with interest rates as high as 10-12% readily available for savings, the returns by REITs [that too after fees and higher taxation] need to be much higher for them to make sense to an average Nepali investor. There is no doubt REITs would aid the economy but considering that most people already have their wealth parked in cash and real estate, REITs wouldn't make sense. We rather need more investment inflow in SMEs which would prove to be a much bigger accelerator of the economy. And then eventually there is the problem of few funds holding majority of the real estate that gives them the free reign to dictate the prices and as what and whom they sell it to. Even if that does not happen, as we have seen around the world, the focus of REITs (rightfully so from their end) would be to generate returns. You will be impressive luxury apartments and complexes but what you won't see is the everyday people because they will already have been priced out and pushed out of their places.