I have got a lot of questions and requests from people willing to know more about Real Estate Investment Trust (REIT) in India. In this blog, I am going to explain in detail what exactly REIT is. I will also get into its benefits to the common public and investors.

The real estate sector is one of the most recognized sectors in the world.

As we all know, the real estate business is basically the property business. It consists of land, building on the land, whether it be residential buildings, commercial towers, apartments, offices, IT-Park or a parking lot. The real estate business includes the purchase, sale or rental of land, buildings or housing.

What is Real Estate Investment Trusts (REIT)

If capital appreciation via real estate is your goal, then REITs are just your thing. Just like mutual funds invest in various securities like equity, debt etc; REITs invest in real estate securities but unlike mutual funds REITs are traded in the stock market. There are many investors amongst us, who would want to invest in the real estate sector in order to diversify our investments and also to gain profits; against buying one residential property and being married to it for life. Times are changing and so is the investment outlook. Regulated by the Securities and Exchange Board of India (SEBI), REITs invest in commercial real estate properties and investors can buy units of this fund via the stock market. The profits earned via rents and capital appreciation are then distributed to the investor in the form of dividends.

REIT Ecosystem

Step 1 – REITs Generate Investments

The REITs may generate investments from one, two or all of the following

  • Private Investors
  • Institutional Investors
  • Companies

Step 2: REIT invests in Commercial Real Estate Spaces

Once the investment is received by the REIT, it looks for premium investment opportunities with good prospects. These can be malls, IT spaces, Commercial establishments, Hotel etc.

Step 3: REIT Receives Capital from Rent, Investments or Selling

The REIT receives payments either in the form of rent or by selling a property.

Step 4: Profits Returned To Investors

The profits is received either by acquiring rent, selling of properties. It is then given back to the investors in the form of dividends.

REIT BENEFIT:

  1. Low entry point and high liquidity
  • Just like mutual funds, you can buy and sell units at will. Minimum investment of Rs 2 lakh.
  • Diversification
  • Exposure to commercial RE along with stocks and other investment.
  • RE can be spread across IT parks, commercial office, malls across multiple cities.
  • Lesser risks
  • As compared to under construction properties or managing commercial properties.
  • Income producing properties.
  • Good stable returns
  • Commercial RE rental yield (7-10%) plus capital appreciations.
  • Lesser volatile than corporate profits and stocks.
  • Transparent
  • REIT share info. On average rent, occupancy levels, tenant profile, buying and selling rate.
  • Professionally managed
  • Like MFs, REIT are managed by professional managers who rely on thorough market research before making buying, selling and renting decisions.
  • Individual don’t have to take hassles of managing tenants and maintaining property.

Limitations of REIT

  • No tax benefits:

 When it comes to tax savings, Real Estate Investment trusts are not of much help. For instance, the dividends earned from Real Estate Investment companies are subjected to taxation.

  • Market-linked risks:

 One of the major risks associated with Real Estate Investment trusts is that it is susceptible to market-linked fluctuations.

  • Low growth prospect: 

The outlook of capital appreciation is quite low in the case of Real Estate Investment Trusts. The table highlights the pros as well as ascons of investing in top Real Estate Investment Trusts.

How to Invest in Real Estate Investment Trusts?

Like popular public stock, investors may decide to buy shares in a particular Real Estate Investment Trust that is enlisted on the major stock exchanges. They should do so in the following three ways.

Stocks: 

Individuals who are looking for a more direct way to invest in Real Estate Investment trusts should consider doing so through stocks.

Mutual funds:

By choosing this option, individuals would be able to expand their investment portfolio pointedly. As it is a secondary investment method, investors would be required to invest in such a fund through a mutual fund company.

Exchange-traded funds: 

With this particular investment option, investors would avail indirect ownership of properties, as well as would further benefit from its diversification.

Notably, Real Estate Investment Trust as an investment option tends to resemble mutual funds, the only difference being that Real Estate Investment Trust holds properties instead of bonds or stock options. Furthermore, Real Estate Investment Trust investors are entitled to avail the assistance of financial advisors to make more informed decisions in terms of investing in a suitable Real Estate Investment Trust option.

Income distribution of REITs

In terms of Income Distribution, REITs are expected to distribute 90% of their net income to their unit holders at least twice a year.

REITs can distribute this income either in the form of dividends or interest payments, depending upon their portfolio.

REITs also inform the investors about the tax implication of this income distribution.

SOME OF THE KEY QUESTIONS

What is the basic difference between direct real estate investments and Reits? 

In REITs investors are investing in a diversified portfolio of commercial real estate assets. With the direct investment route for commercial office spaces, investors invest in a single office property.

What are the difference in returns for REITs and real estate investments?

Small investors will raise a pertinent question – will REITs be able to offer the same returns on investment that they can expect from ‘real’ real estate investments? The answer is no. Definitely, investors who are hoping for unrealistic returns (>20-30%) will need to look elsewhere. Being realistic in one’s returns expectations from REITs is important. A realistic ROI expectation would be in the range of 7-8% annually, post adjustment of the fund management fee.

With REITs, the ROI will be highly structured, realistic and risk-averse. REITs are ideal for investors who want a steady income with minimum risks. Moreover, investors can earn two types of income from REITs – one through capital gains post the sale of REIT units, and the other via dividend income. Moreover, REITs will be a good investment option for investors who are looking to diversify their portfolio beyond gold and equity markets.

The bottom line

For most investors, the benefits of incorporating Real Estate Investment trusts into a well-diversified investment portfolio outweigh the risks. Nonetheless, it’s imperative to know what you’re getting into before adding any type of investment to your portfolio.

The above pros and cons can help guide your decisions about how much of your assets you want to invest in Real Estate Investment Trusts. Use them to set realistic expectations about your investments as well as make the right decision for your portfolio.

Rtn. Er. Bhanu Pratap Jain, CFPCM |CII (Award) UK| CFGP The author is a computer science engineer by qualification and a certified financial planner by profession. He helps professionals and businessmen with personal finances and help them retire early. His firm manages wealth for 700 families since last 50 years with assets under management and advisory of more than 200 Crores . He can be reached at ceo@financialarchitect.in

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