Mortgage REIT

A Mortgage REIT does not own a single building. It owns real estate loans and mortgage-backed securities, and its income comes from interest on those loans, not from any tenant's rent.

This makes it a very different investment from an Equity REIT, even though both are called REITs and both list on a stock exchange. An Equity REIT's fortunes track occupancy and rental cycles; a Mortgage REIT's fortunes track interest rates and borrower credit quality, the same forces that drive a bank's or an NBFC's lending business.

Classification (Chapter 6, section 6.3). The workbook's table:

Two risks that come with lending instead of owning. A Mortgage REIT carries interest rate risk: if rates rise, the market value of its existing fixed-rate loan book falls, even while new loans earn more. It also carries credit risk: if a borrower defaults, the REIT's income and capital both take the hit, a risk an Equity REIT holding the physical property directly does not carry in the same form. The workbook states the definition and the income source, but gives no numeric limit, such as a minimum share of assets in mortgages, for how a Mortgage REIT must be constituted in India.

Ambika Mortgage REIT raises ₹800 crore and deploys it into a portfolio of commercial real estate loans and mortgage-backed securities, earning a blended interest rate of 9.2% a year, or ₹73.6 crore of interest income in its first year, most of it distributed to unit holders.

Two years later, market interest rates rise by 1.5 percentage points. Ambika's existing fixed-rate loans still pay 9.2%, but the market value of that loan book falls, because new loans of similar credit quality now command 10.7%. At the same time, one large borrower, a mall developer, defaults on a ₹40 crore loan in the portfolio, forcing Ambika to write down that exposure.

Neither event would touch an Equity REIT holding a leased office building outright. A rate rise does not reprice a completed building's rent roll, and a tenant's financial trouble affects one lease, not the REIT's entire capital position the way a loan default can.

Chapter 6 (Collective Investment Vehicles), section 6.3, sets out Mortgage REITs alongside Equity and Hybrid REITs. Expect a question distinguishing the three by income source, and a question on the specific risks, interest rate and credit risk, that a Mortgage REIT carries and an Equity REIT does not.

• A Mortgage REIT is a lender, not a landlord. It holds paper, loans and mortgage-backed securities, not physical property.
• Interest income, not rent, and that interest is exposed to rate risk and borrower credit risk in a way rental income is not.
• Rising interest rates hurt a Mortgage REIT's existing loan book's market value, even though its stated coupon does not change.
• Do not assume a Mortgage REIT is safer because it is "debt". A borrower default hits it directly, unlike an Equity REIT's diversified tenant base.