If you want to invest in the real estate sector in India, but don’t have the time, money, or expertise to buy and manage 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.

 

In this article, we will provide an overview of REITs, how they work, how they differ from real estate investing, and what are the benefits and risks of investing in Real Estate Investment Trusts in India.

 

Real Estate Investment Trusts : What are REITs?

 

REITs are modeled after mutual funds, but instead of investing in stocks and bonds, they invest in real estate properties and/or mortgages. They pool the capital of numerous investors and use it to buy and manage real estate assets. They then pass on the income and gains from the assets to the investors as dividends.

 

REITs were introduced in the US 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.

 

Real Estate Investment Trusts : How do REITs work?

 

REITs are 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 Real Estate Investment Trusts 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.
• Listing: A REIT in India must be listed on a recognized stock exchange, and must raise funds through an initial public offering (IPO). The minimum subscription amount for the IPO 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 Real Estate Investment Trusts in India 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 Real Estate Investment Trusts in India 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 Real Estate Investment Trusts in India 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.

 

Real Estate Investment Trusts : How do REITs differ from real estate investing?

 

Investing in REITs is different from investing in physical real estate in many ways, such as:

 

• 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.
• Low Entry Barrier: You can invest in REITs with a minimum amount of Rs. 50,000, whereas buying a physical property may require lakhs or crores of rupees. REITs also have lower transaction costs and taxes compared to physical real estate.
• High 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.
• Regular Income: REITs provide a steady and predictable source of income for the investors, as they distribute most of their income as dividends. The dividends are also tax-free in the hands of the investors. Physical real estate, on the other hand, may have irregular and uncertain rental income, and may also incur expenses for maintenance, taxes, etc.
• Capital Appreciation: 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. Physical real estate, on the other hand, may have lower capital appreciation potential, as it depends on the location, condition, and marketability of the property.

 

Real Estate Investment Trusts :What are the benefits and risks of investing in REITs in India?

 

Investing in REITs in India has several benefits and risks, such as:

 

• Benefits:
  • REITs offer a way to invest in the real estate sector, which is one of the fastest-growing and most resilient sectors in India, with a huge demand and supply gap.
  • REITs offer a regular and tax-free income stream for the investors, which can help them meet their financial goals and beat inflation.
  • REITs offer a diversification benefit for the investors, as they have a low correlation with other asset classes such as stocks and bonds.
  • REITs offer a liquidity benefit for the investors, as they can easily buy and sell the units or shares of the REITs on the stock exchanges, without any hassles or delays.
  • REITs offer a transparency benefit for the investors, as they are regulated by SEBI and have to follow strict disclosure and reporting norms, which ensure fair and accurate information for the investors.
• Risks:
  • 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.
  • 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.
  • REITs are subject to the 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.
  • 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.

 

Conclusion Real Estate Investment Trusts

 

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.

 

Sources:

 

• Real Estate Investment Trust (REIT): How They Work and … – Investopedia
• What is a REIT (Real Estate Investment Trust)? | REIT.com
• Best-Performing REITs: How to Invest in Real Estate Investment Trusts …
• The REIT Way – Investopedia

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