Are global Reits a good diversification option?

Having launched funds based on global indices such as S&P 500 and Nasdaq 100, Indian asset management companies (AMCs) are increasingly focusing on global thematic and sectoral funds as more and more Indians look to experiment with their international portfolios.

Over the past 10 years, the mainstay in most of the global portfolios of Indian investors was US-listed stocks such as FAANG—Facebook, Amazon, Apple, Netflix and Google). In the recent past newer themes such as electric vehicles and real estate have come into picture.

Three fund houses recently filed applications for electric vehicle schemes with the Securities and Exchange Board of India (Sebi), as EVs have been finding favour globally, including India.

Additionally, a few fund houses have launched global real estate funds as they look to capture business recoveries on the back of roll-out of covid-19 vaccines and reopening of economies.

PGIM India Mutual Fund on Monday will launch an open-ended equity scheme called PGIM India Global Select Real Estate Securities Fund of Fund (FoF). The scheme is India’s first global real estate securities fund.

The scheme will invest in Ireland-domiciled PGIM Global Select Real Estate Securities Fund, which primarily invests in Reits (real estate investment trusts) and equity-related securities of global real estate firms. The scheme will have exposure to realty markets in the US, Japan, the UK, Australia and Hong Kong, among others.

Funds that were launched earlier such as Kotak International Reit FoF and Mahindra Manulife Asia Pacific Reits FoF were largely focused on markets in Singapore, Australia and Hong Kong in the Asia-Pacific region.

Kotak International Reit FoF—launched in December 2020—invests into SMAM Asia Reit Sub Trust Fund is the largest Asia-Pacific REIT Fund with assets under management of $1.2 billion. The Indian scheme has delivered a return of 3.91% since its inception.

Mahindra Manulife Asia Pacific REITs FoF, which was launched in October 2021, invests into Manulife Global Fund–Asia Pacific REIT Fund.

Meanwhile, Aditya Birla Sun Life Global Real Estate Fund, which was launched in 2007 was renamed to Aditya Birla Sun Life Global Excellence Equity FoF in February 2021.

“There are two reasons why Indian investors are looking at global realty: diversification and return potential, which according to them could be better than their Indian real estate portfolio,” said Harshad Chetanwala, a Sebi-registered investment adviser and co-founder of MyWealthGrowth.com.

According to experts, Reits are a great way to diversify a portfolio, but does diversification into global realty make sense?

Reits own, operate or finance income-generating real estate such as commercial properties.

Like mutual funds, Reits pool capital from numerous investors. This allows anyone to invest in portfolios of real estate assets the same way they invest in other industries—through the purchase of individual company stock or through a mutual fund or exchange-traded fund (ETF). Reits also have to distribute most of its cash flows as dividends to unitholders. Therefore, Reits benefit investors via appreciation potential through increase in property valuation as well as dividend yield.

Moreover, a key benefit of a global Reit is that unlike India, where listed Reits invest majorly in office spaces, investments in global realty funds offer diversified investment portfolio in residential, office, data centres, warehousing, retail and hospitality.

As of now there are only three listed Reits in India— Brookfield India Real Estate Trust, Embassy and Mindspace Business.

“As concerns around new variants of covid-19 ease, allowing workplaces and service-oriented industries to reopen more fully, occupier sentiment is expected to return quickly supporting a rebound in real estate space demand," said Rick Romano, managing director, PGIM Real Estate and head of Global Real Estate Securities Business.

Ajit Menon, CEO, PGIM India MF said that various sub-themes like Grade A commercial, self-storage, logistics, last-mile retail and cold storage, among others are either not available in India or not available at scale as investible securities compared to global markets.

“With interest rates and inflation where they are today, this strategy will be an important addition to build resilience in client portfolios for times ahead," he said.

Another advantage is that the underlying fund will be able to take advantage of the dollar appreciation. However, experts warn that whether domestic or international, sectoral and thematic funds always carry higher risk. “Diversified portfolios can work better for investors; even Nasdaq 100 index is almost 40% into IT. So, from a diversification perspective, the S&P 500 index may serve better than the Nasdaq 100 when it comes to investing in an international index. Considering international sectoral or thematic funds at this stage will be like adding additional risk," said Chetanwala.

A big challenge for an individual investing in global real estate funds would be the lack of information about geographies where the properties are situated.

“These products are somewhere between debt and equity; they are neither debt nor equity. So, while you are investing in real estate, look at it as diversification from equity and debt, as this will also give you global diversification and currency deprecation advantage. But all in all, look for debt plus 1% kind of returns," said Kirtan Shah, chief financial planner at Sykes and Ray Equities (I) Ltd.

In the overall portfolio, the global allocation could be restricted to 5-15% across asset classes depending on the client’s portfolio and appetite, said experts.

“Within that space, how much additional risk will you take? So, unnecessarily complicating it may not always work in the investor’s interest," said Chetanwala.

Before planning to invest in global realty funds, investors should also keep taxation in mind. Since all global realty schemes are FoFs, these funds are treated as debt funds. The gains for a holding period of less than three years are treated as short-term capital gains, and are taxed at the slab rate. The gains over a holding period of more than three years are treated as long-term gains and are taxed at the rate of 20% post indexation.