Background

Real estate is an asset class that is traditionally valued most along with Gold, not just from investing point of view, but also as a necessity, like house. Investing directly into real estate has its own issues like large ticket size (may not be affordable for most), illiquid nature (not easy to find a counter party to transact), hidden legal issues, concentration risk etc. Primarily due to these factors, many will stay away from investing into real estate sector though they are interested. REIT is a good option for many to have exposure to this sector as it provides diversification, liquidity, steady cash flow etc. Let us understand more about REITs in this article.

REIT

REITs are companies or corporations that owns and operates real estates to generate income. Income generated is distributed to the investors. Simple explanation of REIT.

It works like Mutual Funds where investors pool in money and the invested amount is managed by professionals by investing into real estate assets.

When a Real Estate Company decides to form a Real Estate Investment Trust, it becomes the Sponsor for the REIT and appoints a Trustee. The Trustee holds the Real Estate Assets of the Trust in its Trusteeship. Trustee appoints a Manager to manage the Real Estate Assets on behalf of the Trust and make investment decisions. After the Manager is appointed, the REIT can be registered. Once registered, a REIT can raise money through the sale of units either publicly on stock markets or through private investors. It is mandatory to list REIT in India.

As per regulations, REIT need to pay out at least 90% of its net taxable income as dividends to its unit holders in the form of dividends. Also, at least 80% of investments need to be in commercial real estate that can be rented out for income generation. Rest up to 20% can be in stocks, bonds, or cash.

REITs in India

There are three REIT available for Investment in India.
• Embassy Office Parks REIT
• Mindspace Business Parks REIT
• Brookfield India Real Estate Trust

They are available to trade in market as stocks. These can be transacted in multiple quantities of 200.

Returns to investors

Like bonds and stocks (only those who issue dividends), REITs also provide steady cash flow to its investors (unit holders).

• Dividend/Interest Payouts – These are paid from the rental income generated by REITs.
• Capital Gains – Since it is traded on markets, its price changes due to demand and their performance. Investors can exit like stocks making capital gains
Benefits of REITs over traditional Real Estate investment
• Steady dividend income and capital appreciation - Investing in REITs can provide regular dividend income and allows steady capital appreciation over the long term.
• Diversification - REITs invest the capital across various projects. Also, it will add diversification to an investor’s portfolio.
• Confidence - Since REITs are regulated by the SEBI and are listed on exchanges, REITs are required to comply with various regulations and provide sufficient disclosures. These bring confidence among investors.
• Liquidity - Most REITs trade on public stock exchanges and hence are easy to buy and sell which is not easily available in traditional real estate investment.

Risks/Limitations in REITs

• As of now, only 3 listed REITs are available for investors
• Since these are new to market , there is not enough awareness among investors making investment as a doubtful one
• Dividends are taxed in the hands of investors (due to recent change in Budget, even cash dividends received from Stocks are also taxed in the hands of investors)