Real estate is one of the most lucrative and sought-after asset classes in India, but it also comes with some drawbacks such as high capital requirement, low liquidity, legal hassles, and maintenance costs. If you want to invest in real estate without owning and managing physical properties, you may consider investing in REITs or Real Estate Investment Trusts.

 

REITs are companies that own, operate, or finance income-generating real estate assets such as office spaces, malls, hotels, warehouses, etc. REITs offer investors a way to participate in the real estate market by buying units or shares of the REIT, similar to buying shares of a company. REITs distribute most of their income to the unit holders or shareholders as dividends, and also offer capital appreciation potential.

 

But how do you start investing in REITs? What are the steps and factors to consider before investing in REITs? In this article, we will provide a beginner’s guide to investing in REITs in India, and explain the basics, benefits, risks, and tips of investing in REITs.

 

What are the basics of investing in REITs?

 

Before investing in REITs, you should understand the basics of investing in REITs, such as:

 

• What is a REIT? A REIT is an acronym that stands for Real Estate Investment Trust. A REIT is a company that owns, operates, or finances income-generating real estate assets across various property sectors. Investors can purchase two primary types of REITs: Equity REITs and mortgage REITs. Each class further falls into three types by how the investment can be acquired: publicly-traded REITs, non-traded REITs, and private REITs.
• How does a REIT work? A REIT is regulated by the Securities and Exchange Board of India (SEBI), which lays down the rules and guidelines for the REITs. Some of the key features of the REITs in India are:
  • Structure: A REIT must have a two-tier structure, consisting of the REIT at the top level, and the special purpose vehicles (SPVs) at the lower level. The REIT must hold at least 51% of the equity share capital or interest in the SPVs, which in turn must hold the real estate assets. The REIT may also invest directly in real estate assets, subject to certain conditions.
  • Listing: A REIT must be listed on a recognized stock exchange, and must raise funds through an initial public offering (IPO) or a follow-on public offer (FPO). The minimum subscription amount for the IPO or FPO must be Rs. 50,000, and the minimum trading lot must be Rs. 1 lakh. The REIT must also comply with the listing and disclosure norms prescribed by SEBI and the stock exchanges.
  • Investment: A REIT must invest at least 80% of its assets in completed and income-generating real estate assets, and up to 20% in under-construction or non-income-generating assets, securities of other REITs, mortgage-backed securities, equity shares of companies deriving at least 75% of their income from real estate, etc. A REIT must also invest in at least two projects, with not more than 60% of its assets in one project.
  • Valuation: A REIT must appoint at least two independent valuers to value its assets at least once a year, and disclose the net asset value (NAV) of the REIT at least twice a year. The valuation of the assets must be done as per the International Valuation Standards or any other standards as specified by SEBI.
  • Distribution: A REIT must distribute at least 90% of its net distributable cash flow to the unit holders or shareholders as dividends, at least twice a year. The dividends are tax-free in the hands of the investors, but the REIT must pay a dividend distribution tax (DDT) of 15% on the dividends.
• How do you invest in a REIT? You can invest in a REIT by buying its units or shares through a broker or an online platform. You can choose from different types of REITs, depending on your risk appetite, investment objective, and preference. You can also invest in REIT mutual funds or ETFs, which are funds that invest in a basket of REITs, and provide instant diversification and lower fees.

 

What are the benefits of investing in REITs?

 

Investing in REITs has several benefits, such as:

 

• Income: REITs provide a regular and tax-free income stream for the investors, as they distribute most of their income as dividends. The dividends are also higher than the average yield of the Nifty 50 index (1.3%).
• Growth: REITs can also offer capital appreciation potential, as the value of the underlying properties may increase over time due to factors such as inflation, demand-supply dynamics, rental growth, etc. The unit price or share price of the REITs may also reflect the changes in the value of the properties.
• Diversification: REITs allow you to diversify your portfolio across different types of real estate assets, geographies, and tenants. You can also benefit from the professional management and expertise of the REITs in selecting and managing the properties.
• Liquidity: REITs are listed and traded on the stock exchanges, which means you can buy and sell them easily and quickly. Physical real estate, on the other hand, may take months or years to sell, depending on the market conditions and demand.
• Transparency: REITs are regulated by SEBI and have to follow strict disclosure and reporting norms, which ensure fair and accurate information for the investors. You can also access the financial statements, annual reports, and NAV of the REITs online.

 

What are the risks of investing in REITs?

 

Investing in REITs also involves some risks and challenges, such as:

 

• Market risk: REITs are subject to the fluctuations of the real estate market, which may be affected by various factors such as economic conditions, interest rates, supply-demand dynamics, consumer preferences, competition, etc. REITs may also face the risk of vacancy, default, or renegotiation of leases by the tenants, which may reduce the rental income and occupancy rate of the properties.
• Regulatory risk: REITs are subject to the changes in the rules and regulations governing the REITs, which may be imposed by SEBI or the government from time to time. For instance, SEBI may impose restrictions on the leverage, diversification, valuation, or distribution policies of the REITs, which may affect their performance and returns.
• Operational risk: REITs may face operational risks such as fire, theft, damage, or litigation related to the properties they own or manage. REITs may also incur expenses for maintenance, renovation, or development of the properties, which may reduce their net income and cash flow.
• Liquidity risk: REITs may have lower liquidity than other equity instruments, as the trading volume and demand for the units or shares of the REITs may vary depending on the market conditions and investor sentiment. REITs may also trade at a discount or premium to their NAV, which may not reflect the true value of the underlying properties.

 

What are the tips for investing in REITs?

 

Here are some tips for investing in REITs that can help you make informed and profitable decisions:

 

• Do your research: Before investing in any REIT, you should do your research and analysis of the REIT’s portfolio, performance, financials, management, and prospects. You should also compare the REIT with its peers and benchmarks, and check its ratings and reviews from reliable sources.
• Diversify your portfolio: You should not invest all your money in one REIT or one type of REIT, as that may expose you to higher risk and volatility. You should diversify your portfolio across different types of REITs, such as equity, mortgage, residential, retail, office, etc., and across different geographies and sectors.
• Reinvest your dividends: You should reinvest your dividends from the REITs, as that can help you compound your returns and grow your wealth over time. You can either use a dividend reinvestment plan (DRIP) offered by some REITs, or buy more units or shares of the REITs with your dividends.
• Monitor your investments: You should monitor your REIT investments regularly, and review their performance, valuation, and distribution. You should also keep an eye on the market trends, news, and events that may affect the REITs, and adjust your portfolio accordingly.

 

Conclusion

 

REITs are a unique and attractive way to invest in the real estate sector in India, without having to buy and manage physical properties. REITs offer regular and tax-free income, diversification, liquidity, and transparency benefits for the investors, along with capital appreciation potential. However, REITs also have some risks and challenges, such as market, regulatory, operational, and liquidity risks, which the investors should be aware of and evaluate before investing in REITs. By following the beginner’s guide to investing in REITs in India, you can start investing in REITs and enjoy the benefits of the real estate sector.

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