What are REITs?

A Real Estate Investment Trust (REIT) is a type of financial vehicle that owns and manages properties that generate regular income. They are similar to mutual funds. The main objective of REITs is to create regular income and capital appreciation. It invests across real estate facilities such as industrial parks, offices, warehouses, hospitality centres, malls, healthcare centres, etc.

REITs pool money from investors by providing them with an easy entry point into the real estate market. They are also an excellent diversifying option for your investment portfolio that offers both regular income and long-term capital appreciation. Furthermore, REITs can be listed on the stock exchange.

What are InvITs?

Infrastructure Investment Trust (InvITs) is a trust that pools money from investors to invest in income-generating assets. The main focus of InvITs is to cash flow over a period of time. They are similar to REITs except that they invest in infrastructure projects such as roadways, transmissions, power plants and other development projects that require time to generate consistent cash flow. Furthermore, they aim to provide a steady stream of income (through dividends) as well as long-term capital appreciation.

Difference Between REIT and InVIT

The following table summarises the difference between REIT and InVIT:

Basis of Difference

Investment Objective

REITs focus on making real estate assets more accessible to individual investors and increasing retail participation.

InvITs focus on making infrastructure investments more accessible to private investors and expanding retail participation in the sector.

Investment Avenue

REITs invest in properties like warehouses, apartments, corporate offices, data centres, shopping malls, etc.,

InvITs invest across infrastructure projects like transmission, roadways, environmental and renewable projects, etc.

Minimum Investment Amount

The minimum subscription amount for REITs is INR 10,000 – 15,000. Earlier it was INR 50,000. The minimum subscription amount for InvITs is INR 10,000 – 15,000. Earlier it was INT 1,00,000.

Income

REITs offer highly stable income. Since they invest in commercial real estate with long-term leases, 80% of REIT assets are invested in income-generating (rental) properties. The long-term contract assures that the REIT receives rent consistently.

InvITs also offer stable income. They invest more than 80% of their assets in operational and revenue-generating infrastructure with long-term contracts. Though they offer stability, the income depends on various circumstances, including tariff constraints, project deadlines, etc. Thus, in comparison to REITs, this is a less stable investment.

Risks

Since REITs own their real estate through long-term leases or freehold ownership, they are safe from political and regulatory threats. Furthermore, as REITs serve corporate clients, they face less political and regulatory risk

Numerous InvITs invest in sectors associated with public welfare (Highways and Utilities), and any delay in regulatory approvals or regulatory changes could risk the infrastructure project. Additionally, any protests by environmentalists against road building or other such issues could risk the revenue generated by the infrastructure project in which InvIT has invested.

Liquidity

Lower unit pricing and smaller minimum trading quantities make REITs more liquid.

Large trading lot size and higher unit price of InvITs, make them less liquid.

Investor Participation and Knowledge

Most investors are familiar with the real estate business; thus, retail investor participation is significant. Also, the future prospects look bright.

Retail investors may be hesitant to engage in InvITs due to their lack of expertise in the infrastructure sector. It may take time for investors to participate in InvITs actively.

Ownership

REITs either own the property or lease it on a long-term basis.

InvITs invest in infrastructure projects that are given back to the authority on completion or rebid once the contract period has expired.

Growth Prospects

REITs have a greater potential for growth due to their ability to remodel current properties, build new ones, and acquire completed/leased assets. REITs can also periodically adjust rents to keep pace with rising market expenses, allowing them to receive a bigger percentage of rental revenue.

InvIT can only grow if it can acquire projects at lower bids. Additionally, revenue increases when the infrastructure asset generates more money than anticipated. This could result in a significant monetary gain for InvIT in the stock market. For instance, a highway project may generate high toll revenue because the traffic is more than anticipated.

Regulations

REITs must follow the SEBI Real Estate Investment Trust Regulations, 2014.

InvITs must follow the SEBI Infrastructure Investment Trust Regulations, 2014.

REIT vs InvIT – Which is Better?

REITs and InvITs are a hassle-free and straightforward way of investing in real estate. You can benefit from the growth of real estate assets without incurring the high costs of acquiring real estate ownership. Simply put, it is like holding real estate in your demat.

InvITs and REITs are attractive to retail investors, HNIs and also retired individuals who are looking for a steady source of income. Moreover, REITs are obligated to distribute the majority of their revenues to investors, and they can serve as a reliable source of steady income, similar to debt funds.

Choosing between the two largely depends on your investment objective and risk tolerance levels. To elaborate, REITs are more liquid since they have lower unit prices and small trading quantities. While InvITs are slightly less liquid than REITs. Furthermore, InvITs are more prone to political and regulatory risks than REITs. Thus, REITs are slightly safer investment options for investors.

REIT or InvIT, remember to analyze them using ratings from independent agencies that score these trusts based on the quality of their assets, cash flows, and other aspects. Additionally, because these investment vehicles are more complicated to grasp than typical mutual funds, you should get expert advice prior to making an investment decision.

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What is Impairment Testing of Goodwill & Assets, and How Does Valuation Help?

 Impairment tests are important for companies to conduct every year or whenever an event leads to a decline in the fair market value of a goodwill asset.

Before we dive into impairment testing of goodwill and the role of business valuation in this, let us look at what a goodwill asset is in a company and how valuing goodwill impacts the overall worth of a company.

What Are Goodwill Assets?

Goodwill in business is an asset that cannot be quantified physically. It cannot be monetized or priced individually. Goodwill can be understood from customer loyalty, brand reputation, research and development of an organization, public trust, the experience of its management team, etc.

What Is Impairment Of Goodwill And Assets?

Goodwill impairment is an accounting charge recorded by the company when the carrying value of the goodwill on financial statements exceeds its fair value. Goodwill is recorded when a company acquires certain assets and liabilities but pays the price in excess of their identifiable net value.

What Is The Legal Scope For Impairment Of Goodwill Assets?

In India, according to the Indian Accounting Standards, the Impairment of Assets is covered under Ind-AS 36. Unlike the Indian GAAP, under which companies seldom perform impairment testing, Ind-AS 36 is more relevant and widespread.

Let us look at the applicability of the impairment of assets, the requirements and methodologies required to apply Ind AS 36, and how a professional service can help you with business valuation and impairment assessment of goodwill assets.

What is The Applicability Of Impairment Of Assets?

The Ind-AS 36 has to be applied while accounting for the impairment of all assets. This is done in all cases except when it is specifically excluded. The assets that come under the purview of Ind AS 36 are:

• Joint ventures, associates, and investments in subsidiaries.
• Plant, property, and all the equipment within
• Goodwill assets as well as intangible assets.

A cash-generating unit approach or CGU is applied to assess the impairment of tangible or intangible assets. In this approach, the recoverable amount is assessed for each CGU and compared with the carrying amount of the CGU. It is then drilled down to asset level.

Also Read, Goodwill and its role as a intangible assets driving Business value

Indicators of Impairment as Per Ind AS 36

One can look for certain indicators to assess whether an asset is impaired. These may include:

• Physical damage of an asset or obsolescence.
• An asset under-performing compared to its expectations
• If the asset is reassessed as having a finite life rather than an infinite life.
• Changes in regulation concerning the asset
• The technological, legal, or economic environment being affected adversely
• Increase in market interest rates

To determine the asset's condition, the following must be conducted annually. This is necessary even if there is no indication of impairment.

• Intangible assets with indefinite useful lives and intangible assets not yet available for use must be tested for impairment
• When a business acquisition or merger occurs, there must be an impairment testing of the goodwill and/or intangible assets.

What is the Methodology to Test Impairment?

There are several techniques employed to test the impairment of an asset. They are

• Estimating Recoverable Amount (RA)
• Comparing Recoverable Amount (RA) and Carrying Amount (CA)
• Recognizing Impairment Loss

How Can RNC Help with Business Valuation in Impairment Testing?

Businesses undergoing a merger or acquisition must consider goodwill and asset impairment testing. Business valuation experts can help accurately derive the value of goodwill and other intangible assets. This is key to determining the correct market worth of a business, which helps to negotiate a fair price when selling or purchasing an asset.

To get unbiased, reliable, and accurate business valuation and impairment testing, reach out to RNC, India's best business valuation firm.

Also Read, Top 8 Situations where business valuation is needed

Goodwill and its Role as an Intangible Asset Driving Business Value

 One of the crucial aspects of evaluating a company’s value is calculating its assets. There are two types of assets, namely tangible assets and intangible assets. Tangible assets refer to physical and quantifiable objects like machinery, products, infrastructure, etc. The intangible assets are non-physical but quantifiable. They include proprietary technology, licenses, copyrights, and so on.

Goodwill is generally perceived as the reputation of a company and the advantage a company has over others in the same field. While goodwill falls under the second category, it differs slightly from other intangible assets. What does this mean? Is goodwill a monetizable asset? How does it add value to the company? 

Many questions surround this topic. In this blog, we’ll answer them for you.

What is Goodwill?

Goodwill in business is a category of assets that cannot be physically quantified and neither be monetized directly nor priced individually. Some examples of goodwill are brand reputation, customer loyalty, public trust, research and development, the experience of its management team, etc.

The goodwill of a company cannot exist independently of the company. It cannot be sold, transferred, or purchased independently. It has an indefinite useful life.

The importance of goodwill comes to the fore during a merger or acquisition. However, it does not relate to the brand value, customer stickiness or customer loyalty generated by the company. 

How is Goodwill Different From Other Intangible Assets?

Goodwill is the premium Paid over the fair of assets during the purchase of company.

Goodwill differs from other intangible assets in that the latter is non-physical but identifiable. A company’s licenses, software, patents, website’s domain name, etc. come under intangible assets. These intangible assets have a value independent of the company and can be bought and sold independently. They also have a definite useful life compared to the indefinite useful life of goodwill. 

Goodwill can be thought of from an economic perspective. It is an aspect that can insulate the company from adverse economic times. A company can have a profitable business even when other businesses flounder due to financial stress.

How Does Goodwill Add Value to the Business?

The question of goodwill and its value arises when a company is being acquired by another. During an acquisition, the acquirer would buy the target company for an amount that includes the net assets at fair value. However, the actual acquisition amount would be higher than simply the value of the net assets. This difference in amount is usually accounted for as the value of the target company’s goodwill.

Goodwill = P-(A-L),

where:

P = Purchase price of the target company

A = Fair market value of assets

L = Fair market value of liabilities.

Although this formula is simplistic, the actual process of calculating goodwill can be quite complex. 

A company that does a lot of acquisitions would have goodwill increasing over time. However, it does not mean that its reputation is increasing. Similarly, a company that is writing off its goodwill from the balance sheet by charging it against the profits would have decreasing goodwill. It does not mean

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Summing It Up

Goodwill is an intangible asset that drives business value beyond the net value of its assets. Before you decide to sell or buy a company, it is vital to make a proper intangible asset valuation. This is why it pays to hire a professional valuation firm with years of experience and knowledge to perform a valuation of goodwill. 

If you are looking for a valuation firm that can do it for you, our team at RNC can help. Book an appointment with us to get your tangible and intangible assets are accurately valued. 

 

ESOPs of Large Startups Have Created Millionaires: How Are They Valued?

ESOPs are making millionaires out of employees of India’s largest tech startups. In 2021 alone, a dozen tech companies such as RazorPay, CRED, and Zerodha announced $100+ million worth of ESOP buyback plans – the highest ever recorded in history of ESOPs in India.

Reportedly, the total ESOP gains for Indian startup employees in 2021 were in the tune of a whopping $335 million.

Naturally, the question arises: How are these ESOPs valued? Before we dive into that question, let us quickly understand what ESOPs are and why they are used.

What are ESOPs?

ESOP stands for Employee Stock Option/Ownership Plan which is an employee benefit plan that is offered to the employees by the company to encourage their ownership in the future based on their performance over a period of time. The shares are given away at reduced rates or completely free to the employees and become part of their income. A flourishing company or startup will have valuable stocks.

Why Do Startups Issue ESOPs?

The main purpose behind distributing the Employee Stock Option or Ownership Plan is to retain talent and motivate them toward employee ownership and share the wealth earned by the company. However, it is important for you as an employee to note how many ESOPs you are getting and how much is each worth; the timeframe within which you will be getting these ESOPs; what is the minimum amount of time you will have to serve with a startup company to be eligible for ESOPs; after leaving the company how much time will you get to exercise these options.

ESOPs are earning opportunities for employees of a company where the value of the shares increases over time in case of large funding, or even overnight in case of acquisitions by more influential companies.

To minimize unfair practices, all businesses should develop transparent selection criteria for ESOPs.

How To Evaluate ESOPs?

An ESOP valuation firm will adopt either of the two methods to evaluate ESOPs:

• Intrinsic Value Method - “Is the excess of the market price of the share under ESOP over the exercise price of the Option.”
• Fair Value Method - Various factors are taken into consideration in this method like the expected life of the Option, the exercise price, fair value per share, expected volatility of share price, expected dividend yield, and risk-free interest rate.

Why is ESOP Valuation Critical For Startups?

ESOPs encourage employees to continue long-term in a company as there are huge monetary gains to make with an accompanying sense of ownership of the company.

A SEBI registered Merchant Banker is qualified to make ESOP valuations. You may contact consultants at a registered ESOP valuation firm who will help to determine the exact value of ESOPs and ESOP stock valuation.

The following are the key reasons for which ESOP valuation becomes mandatory for startups-

• To retain the talent pool that helped the company to accomplish its end goals, and to incentivize them to become an owner by acquiring those ESOP stocks at a predetermined date at a predetermined price
• It is in keeping with the Indian Income Tax Act, 1961, and the notification issued by CBDT (The Central Board of Direct Taxes). ESOP stock valuation is important to determine the value of the taxable shares.
• Employers should have knowledge of the fair market value of the equity share in which they are investing and stock-holding to make profitability in the future.

Final Thoughts

ESOPs are a favorable means of employee compensation and are a huge hit with companies these days. However, diligent planning and valuation of ESOPs are necessary to reap their intended benefits.

If you want to know more or you’re looking to get expert advice on ESOP stock valuation, RNC can help. As a leading ESOP valuation firm, we offer trusted ESOP valuation and identify risks and opportunities in ESOP models of companies of all sizes.

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