Real estate is one of the most attractive and profitable sectors in India, but it also comes with some challenges such as high capital requirement, low liquidity, legal issues, 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 REITs work in the Indian market? What are the benefits and risks of investing in REITs? How can you start investing in REITs? In this article, we will answer these questions and provide a comprehensive guide on Real Estate Investment Trusts (REITs) in the Indian market.
What are the features of Real Estate Investment Trusts in the Indian market?
Real Estate Investment Trusts in India 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 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.
- Listing: A Real Estate Investment Trusts in India must be listed on a recognized stock exchange, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). A REIT 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 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 REIT 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 REIT 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.
What are the benefits of investing in Real Estate Investment Trusts in the Indian market?
Investing in Real Estate Investment Trusts in the Indian market 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 Real Estate Investment Trusts in the Indian market?
Investing in REITs in the Indian market 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.
How can you start investing in Real Estate Investment Trusts in the Indian market?
If you are interested in investing in REITs in the Indian market, you can follow these steps:
- 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. You can use the web search results from my predefined internal tool1 to get some information about REITs in the Indian market.
- Choose your type of REIT: You should choose the type of REIT that suits your risk appetite, investment objective, and preference. You can choose from equity REITs, mortgage REITs, or hybrid REITs, and from publicly-traded REITs, non-traded REITs, or private REITs. 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.
- Open a demat and trading account: You need to open a demat and trading account with a broker or an online platform, which will enable you to buy and sell the units or shares of the REITs on the stock exchanges. You should choose a broker or a platform that offers low brokerage charges, high security, and good customer service.
- Buy and sell the units or shares of the REITs: You can buy and sell the units or shares of the REITs through your broker or online platform, by placing your order and paying the required amount. You should monitor the price movements and the market trends of the REITs, and decide when to buy or sell them, depending on your investment strategy and goals.
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 have a special structure, listing, investment, valuation, and distribution mechanism, which provide income, growth, diversification, liquidity, and transparency benefits for the investors. 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 this guide on Real Estate Investment Trusts (REITs) in the Indian market, you can start investing in REITs and enjoy the benefits of the real estate sector.
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