NFO review: Kotak International REIT FoF; should you invest in this NFO?

Kumar Shankar Roy   /   December 11, 2020
Kotak International REIT FoF

As the size of individual wealth portfolio increases, a slice of property always finds its way in. But the old concept of directly buying, holding, and managing real estate is fraught with various problems. This is why Real Estate Investment Trusts (REITs) provide an easy way in terms of gaining exposure to real estate to investors without physically dealing with them.  

The first real estate investment trust (REIT) listing in India was from Embassy Office Parks in 2019. Then, came the 2nd REIT in the form of Mindspace Business Parks. But, that’s a very limited basket if you want to invest only in Indian REITs. Investors want choice and for those who want to gain from a wider universe such as Asia-Pacific real investment trusts (REITs), Kotak Asset Management Company has launched ‘Kotak International REIT FoF (Fund of Fund)’. 

This new product, which is open for subscription till Dec. 21, is India’s first global REIT FoF. To be clear, the money you invest in Kotak International REIT FoF will get invested in units of SMAM ASIA REIT Sub Trust Fund and/or other similar overseas REIT funds. In this article, we will tell you more about the Kotak International REIT FoF so that you can take an informed decision about investing.

Q: What is REIT

A: REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. Most REITs trade on major stock exchanges, and they offer a number of benefits to investors. 

Typically, REITs invest in real estate property including offices, apartment buildings, warehouses, retail centres, medical facilities, data centres, cell towers, infrastructure and hotels. 

Q: How REITs make money

A: Most REITs lease space and collect rent on its real estate. In this way, the company generates income which is then paid out to shareholders in the form of dividends. 

There are some REITs who don’t own real estate directly, but they finance real estate and earn income from the interest on these investments.

Q: Why invest in REITs

A: Historically, REITs have delivered competitive total returns. This is on the basis of steady dividend income and long-term capital appreciation. 

Also, REITs are said to have a comparatively low correlation with other assets, which makes them an excellent portfolio diversifier.

Q: Why invest in REITs outside India

A: SMAM ASIA REIT Sub Trust Fund is the Largest Asia Pacific (ex Japan) REIT Fund. At this moment if you invest in the two listed REITs in India, you will get exposure to majorly the Office sector in 5-6 cities.

In comparison, Kotak International REIT FoF through SMAM ASIA REIT Sub Trust Fund offers exposure to varied REITs across geographies through the underlying fund. Your money gets you exposure to properties including offices, residential, data centres, logistics, warehouses. Also, you get multi-country exposure viz. properties in Singapore, Australia, Hong Kong, New Zealand, Thailand, India etc.

Q: How will Kotak International REIT FoF invest

A: The Kotak International REIT FoF can invest 95-100% in units of SMAM ASIA REIT Sub Trust Fund and/or other similar overseas REIT funds.

Also, it can invest 0-5% in debt and money market instruments and/or units of debt/liquid schemes of domestic mutual funds.

Q: Why SMAM ASIA REIT Sub Trust Fund 

A: As mentioned previously, this the largest Asia Pacific (excluding Japan) REIT fund. We think this is one of the main reasons Kotak International REIT FoF has chosen it to be the underlying fund. Because this is a Fund of Fund, the Indian fund manager hardly has any role in terms of investments. So, some attention is required to be given on the underlying fund.

Secondly, this underlying fund offers a gateway to capturing attractive dividend yields, which are higher than government bonds, normal stocks, and REITs in other regions.

Thirdly, the SMAM ASIA REIT Sub Trust Fund offers a decent combination of Asian REITs (mostly in Singapore and Hong Kong) to take advantage of relatively higher dividend yield, and Pacific REITs (mostly Australian REITs) to form a portfolio that produces stable dividend yields from well-established markets.

Fourthly, in the Post-Covid world, the world of real estate investments could operate very differently. The SMAM ASIA REIT Sub Trust Fund has zero exposure to hotels (the highest impacted area due to Covid). The underlying fund is underweight on the Retail sector as well. Instead, it has chosen to bet big on the least impacted by Covid disruption (Industrial 34%, Diversified 23% and speciality 11%). 

Q: Why not other region REITs

A: Dividend yield levels of Singapore and Australia are higher than those of UK, US and Japan.

Also, at this point in time, Indian MF investors have no pure-play way to get exposure to US, UK, Japan REITs.

Additionally, Asia Pacific REITs offer exposure to the highly organized real estate sector, strong growth potential, and an expanding market.

Q: What returns can be expected from Kotak International REIT FoF

A: The Kotak International REIT FoF is a new product, and has no history of returns. It however will invest in an underlying fund which has been around for about 10 years.

The average dividend yield of SMAM ASIA REIT Sub Trust Fund is 4.3% (as of the end of October 2020).

According to Freefincal, the returns of the underlying fund have swung from -4% to 14% over three-year rolling windows and from 2% to 10% over five-year rolling windows. 

In short, the returns of Kotak International REIT FoF can be more debt like than equity. 

Q: Is this a high-risk product?

A: The risk-o-meter given along with the product indicates ‘high risk’.

Q: What will be the cost to an investor in Kotak International REIT FoF

A: The underlying scheme will have a total expense ratio of around 0.77% per annum of daily net assets. Any other costs will be added to this. Do note that the 0.77% amount is not fixed and could change in the future. 

Q: What is the exit load in Kotak International REIT FoF

A: There will be 1% exit load charged for redemptions / switch outs (including IP/STP) within 1 year from the date of allotment of units, irrespective of the amount of investment.

Q: How will your returns in Kotak International REIT FoF be taxed

A: Short-term capital gain tax will be levied according to the income tax slab of the investor if units are sold before 36 months. 

If the units are sold after 36 months, a long-term capital gain tax of 20% with indexation will be levied.

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