Author: shyam

Indian REITs – Why You Should Care

The SEBI and the RBI are almost done with finalizing the regulation around REITs. Here’s a quick primer of what’s in store.

What are REITs?

REIT stands for Real Estate Investment Trusts. It is a company that mainly owns, and in most cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. The shares of REITs can be listed on a stock exchange and can be traded just like any other stock or ETF.

How are REITs structured in India

Size

The size of the assets under the REIT shall not be less than Rs. 1000 crore which is expected to ensure that initially only large assets and established players enter the market.

Public participation

Minimum IPO size should be Rs. 250 crore and minimum public float should be 25%. Initially, till the market develops, the units of the REITs may be offered only to HNIs/institutions and therefore, the minimum subscription size shall be Rs. 2 lakhs and the unit size shall be Rs. 1 lakh.

Regulatory requirements

The REIT can only invest in assets based in India.

The manager needs to have at least 5 years of related experience coupled with other requirements such as minimum networth, manpower with sufficient relevant experience, etc.

The sponsor of the REIT will have to maintain a certain percentage holding in the REIT to ensure a “skin-in-the-game” at all times.

90% of the value of the REIT assets shall be in completed revenue generating properties.

90% of the net distributable income after tax of the REIT should be distributed to the investors.

The REIT cannot invest in vacant land or agricultural land or mortgages. But can hold mortgage backed securities.

The aggregate consolidated borrowings and deferred payments of the REIT have been capped at 50% of the value of the REIT assets.

The NAV should be declared at least twice a year.

You can read the full set of regulations on the SEBI website (pdf).

Who is likely to benefit?

Real estate developers might see a benefit in terms of reduced funding costs in the short-term. Mall-operators might choose to offload some of their properties into the new structure.

There might be a brief period of disruption as pricing information becomes public and developers lose their ability to exploit information asymmetry. The rent-vs-own argument gets new data points as well.

For the long-term, this gives investors the ability to gain liquid exposure to an otherwise illiquid asset class. Instead of trying to develop a multi-tenant apartment block yourself, you can just go buy a REIT for a lot less headache.

Watch for companies like Brigade and DLF to move their serviced apartments and malls into the new structure. And maybe push some unsold inventory as well. [stockquote]DLF[/stockquote] [stockquote]BRIGADE[/stockquote]

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Global Finance Facts That Were Unspeakable Just 5 Years Ago

Gillian Tett has a brilliant article on FT about the “sacred cows” of finance that have been sent out to pasture over the last 5 years and the new line of thinking that has evolved:

  1. Bigger is no longer better
  2. Finance is no longer viewed as self-stabilizing
  3. We now know that taxpayers are on the hook when finance goes wrong
  4. Leverage matters
  5. Liquidity matters
  6. Bubbles form
  7. Structural solutions are not taboo
  8. Shadow banking should not remain in the shadows

 

To this, I will add:

  1. Policies always have unforeseen side-effects
  2. Regulatory arbitrage happens faster than regulation

Source: Ideas adjust to new ‘facts’ of finance

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Where do returns come from?

Philosophical Economics has a gem of a piece out on what influences total return.

Total returns on holding equity securities come from:

  1. the change in price from purchase to sale, and
  2. the dividends paid in the interim

i.e. Total Return = Price Return + Dividend Return
 

Price Return =

Price Return from P/E Multiple Change
+ Price Return from Earnings Growth (Realized if P/E Multiple Were to Stay Constant)

 

Stock prices don’t change because market participants choose to assign stocks different P/E multiples. Rather, they change because the eagerness of the aggregate investment community to allocate wealth into stocks rises or falls. More investors try to “put money to work” than try to “take money off the table”, and vice-versa. In the presence of the imbalance, the price has no choice but to change.

 

So, Price Return =

Price Return from Change in Aggregate Investor Allocation to Stocks
+ Price Return from Increase in Cash-Bond Supply (Realized if Aggregate Investor Allocation to Stocks Were to Stay Constant)

 

For a given set of environmental contingencies–e.g., history, culture, demographics, etc.–the equity allocation preference is mean reverting. It rises in expansionary parts of the cycle, as people become more optimistic about the future and more eager to maximize what they see as attractive returns, and it falls in contractionary parts of the cycle, as people become less optimistic about the future and more concerned about protecting themselves from losses.

 

This is also backed up by another piece of research that shows that in the long-run, economic growth and stock market returns are negatively, not positively, correlated. Why? Because investors routinely appear to overpay for growth. Besides stock returns is determined by earnings growth per share, not economy-wide corporate earnings growth. The two can vary markedly.

equity returns vs gdp

In other words, investors should invest more in equities when the economy is in the shitter and exit when they hear “India Shining” ads.

 

Source:
The Single Greatest Predictor of Future Stock Market Returns
Rising GDP not always a boon for equities

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Weekly Recap: Everything Has A Price

nifty weekly performance heatmap

The Nifty ended the week +1.72% (+1.53% in USD terms). It was week with a lot of surprises. The market expected the RBI to raise rates but it held steady. The consensus was that the US Fed would hold off tapering but it announced a $10B taper. Three months ago, stock markets around the world fell on taper fears, but rallied when the taper was finally announced.

Index Performance

IT stocks rallied on improving US and Eurozone fundamentals. Glaxo’s buyback offer pushed MNC & Pharma indices.

index weekly performance

Top Winners and Losers

SRTRANSFIN +10.53%
CUMMINSIND +11.18%
GLAXO +19.13%
UBL -4.21%
HDFCBANK -3.67%
JINDALSTEL -3.60%
Cummins can finally be moved to “value in motion” from “value in waiting.”

ETFs

JUNIORBEES +4.08%
INFRABEES +2.36%
NIFTYBEES +1.60%
PSUBNKBEES +1.39%
BANKBEES -1.27%
GOLDBEES -2.07%
Gold is turning out to be a rout this year. Looks like the US Fed has engineered a perfect recovery…

Advancers and Decliners

advancers and decliners

Yield Curve

RBI’s decision to hold rates steady lead to a pretty adjustment…

yield curve

Investment Theme Performance

Market Elephants +10.62%
Growth with Moat +7.67%
Balance-sheet Strength +6.99%
Velocity* +6.50%
Efficient Growth +5.33%
Momentum 200 +5.13%
Long Term Equity* +5.02%
Financial Strength Value +4.07%
Quality to Price +3.90%
Consistent10* +3.70%
Magic Formula Investing +2.14%
Market Fliers +2.07%
ADAG Mania +0.97%
Enterprise Yield +0.13%
Market elephants had a windfall gain due to Glaxo’s buyback offer. Momentum themes turned in a strong show as well.

*Contributed Themes

Sector Performance

weekly sector performance

Thought for the Weekend

If you thought women disliked randy ads, think again.

When men and women view sex-based ads featuring a cheap watch versus an expensive one, their reactions differ. Men’s reactions don’t vary much, regardless of how much the watch costs. Women, in contrast, strongly dislike the sexual ad when it’s selling a very cheap watch, but they tolerate it when it’s selling a watch that’s expensive.

Source: Women Will Tolerate Sexually Explicit Ads — at the Right Price

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Finance + Research

Ran across a couple of interesting posts on research in finance.

First, the difference between science and magic:

Magic is based on belief in a set of rituals. A person will only consult a magician if they have faith in the actions that the magician will perform. Science is not based on belief in its theorems, the equivalent of magic’s rituals, but on a belief in the process by which science is created.

Second, the need for scientific research to be conducted in the open:

For science to be reputable and maintain a divide with magic, it needs to be carried out, like religion, in the open. As soon as either science or religion takes place out of the public arena, they risk degenerating into magic.

Third, research in finance is devolving into magic, because it is conducted behind closed doors:

The science, the mathematics, is not being used to enlighten finance but to obscure its practices. Recently the report on J.P. Morgan’s London Whale revealed how tweaking their model, the bank could reduce their apparent exposure from around $40 billion to $20 billion. The Whale report highlights how finance is actually more committed to ‘rituals’ around risk management than the ‘science’ of risk management, and this seems to be facilitated by mathematics.

Fourth, the incumbent gatekeepers will have none of the openness:

Reed Elsevier, which owns many of the most prestigious research journals in the world, has been sending mass research takedown notices to everyone from startups like Academia.edu to individual researchers and universities. They want final articles need to be “readily discoverable and citable via the journal itself.” They’ve been asking researchers to take down their work.

Fifth, it is not enough to just make papers public, but also the underlying data in a machine-readable format:

Reinhart and Rogoff wrote in their 2010 paper that average annual growth was -0.1% in countries with episodes of gross government debt equal to 90% or more of GDP between 1945 and 2009. This was picked up by politicians to push an austerity driven fiscal policy. But it turned out that the researchers had made some Excel errors. Krugman went so far as to say that it was excluded on purpose because those rows contained data for high-debt countries with decent growth immediately after World War II, which would have greatly weakened their result.

So the only way research can be scientific is for it to be open. But incumbent businesses want to force it behind pay-ways. The way this works out is going to be a big deal.

Source:
Is finance guided by good science or convincing magic?
Elsevier’s Research Takedown Notices Fan Out To Startups, Harvard, Individual Academics
Reinhart, Rogoff, and the Excel Error That Changed History
Holy Coding Error, Batman

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