Real Estate Investment Trusts (REITs) are a type of pooled investment vehicle that owns, operates, and finances income-generating real estate assets. REITs offer investors a way to invest in the real estate sector without having to buy or manage properties themselves. REITs also provide regular income in the form of dividends and capital appreciation in the form of price appreciation.
How to Invest in REITs : REITs are relatively new in India, as the first REIT was listed in 2019. Since then, three REITs have been launched in the Indian market: Embassy REIT, Mindspace REIT, and Brookfield REIT. These REITs mainly focus on commercial office spaces, which account for about 80% of their portfolios. The rest of their assets include hotels, retail, and industrial properties.
In this article, we will look at how to invest in REITs in India, what are the benefits and risks of investing in REITs, and what are the factors to consider before investing in REITs.
How to Invest in REITs in India
Investing in REITs in India is similar to investing in stocks or mutual funds. You need to follow these steps to invest in REITs in India: How to Invest in REITs
- Open a demat account: A demat account is an account that holds your securities in electronic form. You need a demat account to buy and sell REIT units on the stock exchange. You can open a demat account with any registered depository participant (DP), such as a bank, a broker, or an online platform. You will need to provide your PAN card, Aadhaar card, bank account details, and other KYC documents to open a demat account.
- Choose a REIT: Once you have a demat account, you can choose a REIT that suits your investment objectives, risk appetite, and budget. You can research the performance and characteristics of the three listed REITs in India, such as their portfolio size, value, occupancy rate, weighted average lease expiry (WALE), distribution yield, loan to value (LTV) ratio, net distributable cash flow (NDCF), and total return. You can also check the ratings and reviews of the REITs by various agencies and analysts.
- Buy REIT units: After choosing a REIT, you can buy its units on the stock exchange through your demat account. You can place an order for the number of units you want to buy at the prevailing market price or a limit price. You can also use the SIP (systematic investment plan) option to invest a fixed amount every month in a REIT. The minimum lot size for buying REIT units is 200 units, which means you need to invest at least Rs. 50,000 to Rs. 60,000, depending on the unit price of the REIT.
- Receive dividends and capital gains: As a REIT unitholder, you will receive dividends from the REIT on a quarterly or half-yearly basis. The dividends are exempt from tax in your hands, as per the current tax laws. You will also receive capital gains if you sell your REIT units at a higher price than your purchase price. The capital gains are taxed at 15% for short-term gains (if you hold the units for less than 36 months) and 10% for long-term gains (if you hold the units for more than 36 months).
Benefits and Risks of Investing in REITs in India : How to Invest in REITs
Investing in REITs in India has several benefits and risks, such as: How to Invest in REITs
- Benefits:
- Diversification: REITs allow you to diversify your portfolio across different types of real estate assets, such as office, retail, hotel, industrial, etc. REITs also have low correlation with other asset classes, such as stocks and bonds, which can reduce the overall risk of your portfolio.
- Liquidity: REITs are traded on stock exchanges, which makes them easy to buy and sell. Unlike physical properties, you do not have to deal with the hassle of finding buyers or sellers, paying brokerage fees, or facing legal issues.
- Income: REITs are required to distribute at least 90% of their net distributable cash flow (NDCF) to their unit holders as dividends. This means that you can expect regular and stable income from your REIT investments. The dividend yield of REITs in India ranges from 6% to 8%, which is higher than the average yield of the Nifty 50 index (1.5%).
- Tax efficiency: The dividends paid by REITs are exempt from tax in the hands of the unit holders, as per the current tax laws. This makes REITs more attractive than other income-generating investments, such as fixed deposits or bonds, which are subject to tax as per your income slab.
- Professional management: REITs are managed by experienced and qualified professionals, who have the expertise and resources to acquire, develop, and maintain high-quality real estate assets. They also have the ability to negotiate better lease terms, optimize occupancy rates, and increase rental income.
- Risks:
- Market risk: REITs are subject to the fluctuations of the stock market, which can affect their prices and returns. REITs are also influenced by the demand and supply dynamics of the real estate market, which can vary depending on the location, type, and quality of the properties. REITs may face challenges in finding tenants, renewing leases, or increasing rents in a weak or oversupplied market.
- Interest rate risk: REITs are sensitive to changes in interest rates, as they affect their cost of borrowing and their valuation. Higher interest rates can increase the debt servicing costs of REITs, which can reduce their NDCF and dividends. Higher interest rates can also lower the present value of the future cash flows of REITs, which can reduce their prices and returns.
- Regulatory risk: REITs are subject to various regulations and compliances, which can affect their operations and performance. REITs have to follow the guidelines and norms issued by the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Income Tax Department, and other authorities. Any changes or amendments in these regulations can have a positive or negative impact on REITs.
- Operational risk: REITs are exposed to the operational risks of managing and maintaining their properties, such as fire, theft, vandalism, natural disasters, accidents, etc. These risks can cause damage or loss to the properties, which can affect their income and value. REITs also have to bear the expenses of repairs, maintenance, insurance, taxes, etc., which can reduce their profitability and dividends.
Factors to Consider Before Investing in REITs in India
Before investing in REITs in India, you should consider the following factors: How to Invest in REITs
- Your investment objectives: You should invest in REITs only if your investment objectives match with the features and benefits of REITs. For instance, if you are looking for regular income, tax efficiency, and exposure to the real estate sector, REITs may be a suitable option for you. However, if you are looking for high growth, low risk, and liquidity, REITs may not be the best option for you.
- Your risk appetite: You should invest in REITs only if you are comfortable with the risks involved in REITs. For instance, if you are willing to accept the market risk, interest rate risk, regulatory risk, and operational risk of REITs, you may consider investing in REITs. However, if you are risk-averse and prefer safer and more stable investments, REITs may not be the best option for you.
- Your budget: You should invest in REITs only if you have a sufficient budget to invest in REITs. For instance, if you have at least Rs. 50,000 to Rs. 60,000 to invest in REITs, you may consider investing in REITs. However, if you have a lower budget and prefer smaller investments, REITs may not be the best option for you.
How to Invest in REITs : Conclusion
REITs are an attractive investment option for investors who want to invest in the real estate sector without owning or managing properties themselves. REITs offer diversification, liquidity, income, and tax efficiency benefits to investors. However, REITs also involve market, interest rate, regulatory, and operational risks that investors should be aware of.
The three listed REITs in India are Embassy REIT, Mindspace REIT, and Brookfield REIT, which mainly focus on commercial office spaces. These REITs have different performance and characteristics, which investors should compare and analyze before investing. Some of the factors to consider are portfolio size and value, occupancy rate, WALE, distribution yield, LTV ratio, NDCF, and total return.
Investors should also do their own research and due diligence before investing in any REITs, as the information provided in this article is for general guidance and educational purposes only. Investors should also consult their financial advisors and tax consultants before making any investment decisions.