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July 12, 2023

Introduction

Welcome to the world of real estate investment trusts (REITs)! If you are an investor who can’t get enough of real estate investments and REIT stocks, then you’re in the right place. In this blog post, we will delve into the world of REITs and explore how they operate in India, their benefits and drawbacks, and whether they are beneficial to real estate portfolios. So let’s get started!

What Is a Real Estate Investment Trust (REIT)?

A Real Estate Investment Trust (REIT) is an entity that directs investable assets toward the ownership and management of income-generating real estate. REIT companies manage portfolios of commercial real estate, such as offices, warehouses, shopping malls, and hotels. By investing in REITs, individuals get the opportunity to own a piece of real estate without the hassle of purchasing and managing properties themselves.

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REITs work similarly to mutual fund companies, pooling the funds of numerous investors and using that capital to purchase properties with income potential. These properties are rented out, generating rental income and capital growth. Dividends from this income serve as a recurring source of income for the investors.

How Does a Company Qualify as a REIT in India?

To qualify as a Real Estate Investment Trust in India, a company must adhere to certain guidelines set by the Securities and Exchange Board of India (SEBI). These guidelines include:

  • The trust agreement needs to be registered as a deed, as per the Registration Act of 1908.
  • The primary goal of the trust should be to operate a REIT company.
  • The trustee, manager, and sponsor should all be separate distinct legal bodies.
  • The parties to the REIT must comply with the requirements listed in Schedule II of the 2008 SEBI (Intermediaries) Regulations.
  • The company must have at least Rs. 500 crore in assets.
  • A minimum of 100 investors should be on the board of the REIT.
  • No less than five people should hold 50% of their share in any given tax year.
  • At least 75% of the investment assets must be in real estate.
  • The REIT should invest at least 95% of its total income.
  • 80% of the corpus should be put to use in assets that may generate income. Construction assets can contribute up to 20% of the overall investment.
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Types of Real Estate Investment Trusts (REIT)

In India, there are six distinct types of REITs, classified based on the industry they operate in and whether they are private or public companies. Let’s take a look at each type:

  1. Equity REIT: Equity REITs are the owners of properties that generate revenue through rent. Investors receive a portion of the income earned by these REITs.
  2. Mortgage REIT or mREIT: Mortgage REITs provide financing to companies in the real estate sector. They earn revenue from mortgage payments and interest on real estate backed by mortgages.
  3. Hybrid REIT: Hybrid REITs generate income through both rent and interest on owned and mortgaged properties.
  4. Publicly Traded REIT: These REITs are registered with SEBI and listed on stock exchanges. Investors can buy and sell shares of these REITs on the stock exchange, making them highly liquid but vulnerable to market instability.
  5. Private REIT: Private REITs operate as private investments and have a small pool of investors. They are not registered on any stock exchange or with SEBI.
  6. Non-Listed Public REIT: Although not listed on the stock market, these REITs are registered with SEBI. They are less liquid but more stable than publicly traded REITs.
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Which are the Most Popular REITs in India in 2022?

In 2022, there are three popular REITs in India. Here are the details:

REIT Occupancy 52-Week High Share Price
Brookfield India Real Estate Trust 86% Rs. 337.28
Embassy REIT 87% Rs. 394.95
Mindspace REIT 84.60% Rs. 365.00

Who Should Invest in REITs?

REITs offer a mechanism for private investors to participate in the revenue generated by income-generating real estate without actually needing to purchase commercial real estate. REITs are a smart way to diversify investments and safeguard them from inflation. They can serve as an alternative investment for individuals looking beyond equities and bonds.

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SEBI’s recent regulations have significantly reduced the minimum investment in REITs to Rs. 15,000, making them more accessible to a wider range of investors. REITs provide consistent income in the form of dividends, making them suitable for those seeking regular returns. They are also a good option for long-term investment, offering stability and potential growth.

Pros and Cons of Investing in REITs

Pros of REIT Investments

  • Diversification: REITs can be a valuable asset for diversifying an investment portfolio, providing exposure to the real estate market without the need for property ownership.
  • Low Investment: Unlike direct real estate investments, REITs require a lower initial investment, making them accessible to a wider range of investors.
  • Professional Management: REITs are managed by professionals, eliminating the need for investors to handle property management.
  • Consistent Source of Revenue: REITs generate income through rent, providing investors with a steady source of income in the form of dividends.
  • High REIT Capital Profits: Profitable REITs can increase in value over time, allowing investors to sell their shares for a profit.
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Cons of REIT Investments

  • Limited Options: The Indian REIT market is still developing, resulting in limited options for investors.
  • Low Liquidity: Although REITs are listed on stock exchanges, they may not have high liquidity due to limited investor participation, making it challenging to sell shares during a recession.
  • Taxation on REIT: Investors must pay taxes on the interest or dividend income earned from REITs, as it is counted as taxable income.

Real Estate Investment Trusts (REIT) Fraud

Investors should exercise caution when dealing with REITs that are not registered with the Securities and Exchange Commission (SEC). To avoid fraud, it is advisable to check the listing of REITs on the SEC’s EDGAR system. Additionally, researching brokers or investment advisors who recommend REITs is recommended to ensure their credibility.

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How to Invest in Real Estate Investment Trusts?

Investing in REITs can be done through various channels. Here are the steps to invest in REITs:

REIT Investing Via Stock Exchanges

Investors can buy shares of publicly traded REITs registered on significant stock exchanges through a broker. Currently, the three REIT options available in India are Brookfield India Real Estate Trust, Mindspace Business Park REIT, and Embassy Office Parks REIT.

REIT Investing Via Mutual Funds

Investors can also invest in REITs through mutual funds. While there are limited local mutual funds available in India that invest in REITs, investing in international REITs through funds like Kotak International REIT Fund is an option for exposure to the global real estate market.

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REIT Investing Via Initial Public Offerings (IPO)

Investors can monitor for REIT IPOs and buy shares once they are listed. However, thorough research and understanding of the REIT’s risk factors are necessary before investing. Due to the evolving nature of the Indian REIT market, there are currently limited options available.

REIT Investing Via Brokerage

To invest in a REIT, one must open a brokerage account. This can be done online or in person. Once the account is set up, investors can research potential REIT investments and make purchases online. It’s important to consider the fees imposed by the broker and the fees associated with the investment itself.

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Regularly reviewing your REIT investment is crucial, just like with any other investment.

Conclusion

Investing in REITs has multiple benefits, such as providing a reliable source of revenue, offering a hedge against stock market fluctuations, and gaining exposure to the wider real estate market. Before making a REIT investment, it’s essential to do your homework and consult with a financial professional to determine if it aligns with your investment goals and portfolio. Remember, owning your investment property may be a wiser course of action if you don’t believe investing in a REIT is the best option for you.

FAQs about REIT

Q1. Is REIT a good investment?

Substantial dividends and long-term capital growth make investing in REITs an excellent option for portfolio diversification beyond standard equities and bonds.

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Q2. How do I buy stock in a REIT?

By purchasing shares through a broker, one can invest in a publicly traded REIT that is registered on a significant stock exchange. Additionally, shares of a REIT exchange-traded fund or mutual fund can be purchased.

Q3. How do beginners invest in REITs?

The investing process for REITs is simple. Beginners can open a brokerage account and start researching potential REIT investments online. Once they have identified a suitable REIT, they can make a purchase. It’s important to be aware of the different fees charged by the broker and the charges associated with the transaction.

Q4. Are REITs better than rental property?

Both rental property and REITs can be excellent long-term investments. REITs offer the advantages of public ownership, professional management, diversification, and regular income. However, rental property provides direct control and potentially higher returns. It ultimately depends on your investment goals and preferences.

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Q5. What is the average return on a REIT?

The average returns from investing in REITs currently range between 12% and 20% per year.

Q6. How long does a REIT last?

Most REITs have no fixed lifespan. Investors can buy and sell shares as and when they want, subject to market conditions and volatility.

That concludes our comprehensive guide on REITs. We hope it has provided you with valuable insights and answered your questions about investing in real estate investment trusts. Remember to always do your own research and consult with a financial professional before making any investment decisions. Happy investing!

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