If you are interested in investing in the real estate sector in India, you may have come across the term REIT. But what does it mean? And how does it work? In this article, we will explore the meaning of REIT, and explain its origin, structure, types, benefits, and risks.

 

Meaning of REIT : What does REIT mean?

 

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 such as office spaces, malls, hotels, warehouses, etc. A REIT offers 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. A REIT distributes most of its income to the unit holders or shareholders as dividends, and also offers capital appreciation potential.

 

The meaning of REIT is derived from its main features, which are:

 

• Real Estate: A REIT invests in real estate properties and/or mortgages, which are tangible and valuable assets that generate income and appreciate over time.
• Investment: A REIT is an investment vehicle that allows investors to pool their capital and benefit from the performance of the real estate assets, without having to buy and manage them directly.
• Trust: A REIT is a trust that holds the real estate assets on behalf of the investors, and ensures that the REIT complies with the rules and regulations of the Securities and Exchange Board of India (SEBI), which is the regulator for the REITs in India.

 

Meaning of REIT : What is the origin of REIT?

 

REITs were created in the United States in 1960, as a way to democratize the real estate market and make it accessible to all types of investors. Since then, REITs have become popular in many countries around the world, including India. The first REIT in India was launched in 2019 by Embassy Office Parks, followed by Mindspace Business Parks and Brookfield India.

 

Meaning of REIT : What is the structure of REIT?

 

A REIT in India 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.

 

The REIT is managed by a board of directors, who are appointed by the sponsor of the REIT. The sponsor is the person who forms the REIT and transfers the property owned by them to the trust. The sponsor must have a minimum net worth of Rs. 100 crore, and a minimum of 5 years of experience in the real estate industry. The sponsor must also hold at least 25% of the REIT units for at least 3 years after listing, and at least 15% thereafter.

 

The REIT also appoints a trustee, who is an independent entity that holds the assets on behalf of the unit holders or shareholders. The trustee ensures that the REIT complies with the rules and regulations of SEBI, and protects the interests of the investors. The trustee also appoints a manager, who is responsible for making investment decisions and managing the REIT assets. The manager is typically a private company closely held by the sponsor.

 

The REIT also appoints an independent valuer, who values the REIT assets at least once a year, and discloses 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. Additionally, the REIT may appoint auditors, registrar and transfer agents, merchant bankers, and custodians, to carry out activities incidental to the operation of the REIT and meet the requirements of law.

 

Meaning of REIT : What are the types of REIT?

 

There are two main types of REITs, based on the nature of their assets:

 

• Equity REITs: These are REITs that own and operate income-producing real estate properties, such as office spaces, malls, hotels, warehouses, etc. Equity REITs earn income from the rents, leases, or sales of the properties, and distribute it to the investors as dividends.
• Mortgage REITs: These are REITs that invest in mortgages or mortgage-backed securities, which are loans secured by real estate properties. Mortgage REITs earn income from the interest or fees on the mortgages, and distribute it to the investors as dividends.

 

Meaning of REIT : Each type of REIT can be further classified into three categories, based on how the investment can be acquired:

 

• Publicly-traded REITs: These are REITs that are listed and traded on a recognized stock exchange, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Publicly-traded REITs are the most liquid and transparent type of REITs, as they can be bought and sold easily and quickly on the stock exchanges, and have to follow strict disclosure and reporting norms.
• Non-traded REITs: These are REITs that are not listed or traded on any stock exchange, but are registered with SEBI. Non-traded REITs are less liquid and transparent than publicly-traded REITs, as they are not subject to market fluctuations and have limited information available to the investors. Non-traded REITs may also charge higher fees and commissions than publicly-traded REITs.
• Private REITs: These are REITs that are neither listed nor registered with SEBI, but are offered to a select group of investors, such as high-net-worth individuals, institutional investors, or family offices. Private REITs are the least liquid and transparent type of REITs, as they are not subject to any regulatory oversight and have no disclosure or reporting obligations. Private REITs may also have higher risks and lower returns than other types of REITs.

 

Meaning of REIT :What are the benefits of REIT investing?

 

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.

 

Meaning of REIT : What are the risks of REIT investing?

 

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.

 

Meaning of REIT : 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 have a special meaning, origin, structure, types, benefits, and risks, which the investors should be aware of and evaluate before investing in REITs. By exploring the meaning of REIT, you can gain a better understanding of this investment option and decide if it suits your goals and preferences.

 

Sources:

• Real Estate Investment Trust (REIT): How They Work and … – Investopedia

Top REIT Mutual Funds in India: Making Informed Investment Choices