image showing a man looking at a real estate property
Infrastructure and real estate contribute heavily to any developing economy and are therefore critical for the economy’s growth. One of the key drivers of a holistic development of any country is its infrastructure. Real estate and infrastructure go hand-in-hand in India, and these receive regular boosts from the government to ensure continued economic progress.
A well-planned infrastructural set-up contributes to a continued inflow of foreign investments and adds to the capital base required for a sustainable growth of every economy. Real estate sector growth complemented by development in the corporate environment helps in increasing demand for office space and accommodations. Because of the lack of availability of public funds, the sector constantly needs additional channels of financing. This is when REIT or Real Estate Investment Trust comes into the picture.
Here, we will discuss everything that investors should know about REIT, from its meaning, evolution to some of its major benefits.
A Real Estate Investment Trust (REIT) is an investment instrument that offers proportionate ownership of an income-generating real estate asset to retail investors. Historically in India, investors have been investing in real estate by purchasing a property or land via real estate developers and property brokers. In such investments, investors had to rely on long-term market value appreciation of the property to generate a return on investment. This, however, was only possible when real estate markets would be on an upswing.
Developers also had to fund projects by sourcing money through loans from banks, PE firms, etc and this usually meant high-interest rates. In 2008, the Security and Exchange Board of India (SEBI) came up with draft guidelines that allowed investors to establish REITs as an asset class. The intent was to make it easier for foreign investors to invest in the Indian real estate market and make funding easily available for local developers.
REITs were first introduced in the USA back in the 1960s on similar lines as mutual funds. These were initiated to boost real estate development through existing investments from investors who were interested in real estate exposure.
At the time, since the real estate market was booming, it presented many opportunities to reap large dividends on the investments made. This paved way for real estate development projects and also rewarded the investors financially.
As far as the Indian market is concerned, REITs were first introduced here by the Securities and Exchange Board of India (SEBI) in 2007. As the investment vehicle started gaining popularity, there were many regulations announced to facilitate smooth operations of these investment funds. Today, REIT companies that are listed on the Indian stock exchanges are constantly monitored and fall under the regulation of the Securities and Exchange Board of India or SEBI.
The flowchart below shows the basic process of a REIT transaction:
Unitholders | Investment in REIT ————-><————- Distributions | REIT | Ownership of assets ————><————- Net property income | Properties | Buy/sell property ———-> <———- | Sponsor |
Mentioned below are some of the commonly available varieties of REITs in India:
As per a report, listed Real Estate Investment Trust (REITs) in India saw a 6.85% year-on-year (YoY) growth in the total leasable area. From only 87.6 million square feet (msf) in Sep’21 to 93.6 msf in Sept’22.
Mindspace REIT was one of the top performers with absolute returns of 8.11% in the YTD Oct’22 period. Brookfield India REIT came in second with 7.30% absolute returns. These two were followed by Embassy REIT with 1.40% absolute returns during the same period.
(Source – moneycontrol)
Investors must consider the below points about taxation on REITs before investing in them:
Additional points on taxation:
Some of the benefits and drawbacks of investing in REITs are given in the table below:
Advantages of REIT Investments | Disadvantages of Investing in REITs |
---|---|
Affordable investment: Shares of REITs are comparatively affordable | Limited growth potential due to large distributions to investors |
Suitable for small investors: Eliminates direct dealing with builders | Higher taxes on dividends compared to other investments |
Lower liquidity risk compared to direct property investment | Potentially high fees and increased risk |
Easy access to information: All pertinent details can be checked online | Vulnerability to real estate market trends and fluctuations |
Assured dividend payment through rental income | Lack of control over performance and management decisions |
Regulated by SEBI, reducing chances of fraud | Potential restrictions on selling shares for a set period of time |
Here are some easy ways in which Indian investors can invest in REITS:
Similar to ETFs, REITs are listed and traded on stock exchanges. Thus, purchasing REIT units is easy as long as an investor has a Demat Account. The price of a REIT unit can change depending on the demand for these on the stock exchanges. Prices are also influenced by the performance of the REIT. At present, there are 3 options of REITs in India–Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust.
In India, very few domestic Mutual Funds invest in REITs, and the actual exposure to real estate is very limited. One can also invest in REITs through mutual funds. In India, investors looking for exposure to international real estate can invest in Kotak International REIT Fund of Fund as it invests mainly in International REITs.
Investors can be on the lookout for REIT IPOs and invest in these when they are launched. This requires thorough research and understanding of all the risk factors of REITs. Since Indian REIT market is still evolving and there are only few REIT options available, investors have to wait for the next IPO to be launched.
Here are some of the important milestones of REIT investment options in India:
Here are the criteria for a company to qualify as a REIT:
REITs are making real estate participation for novice investors smooth and easy. Apart from the benefits of dividends, these also offer liquidity to an investor’s portfolio. Investors who are looking for real estate exposure must explore these investment vehicles, especially through IPOs.
Millennials who want to gain real estate exposure but are not comfortable investing a bulk amount can explore REITs. These also offer far more liquidity as compared to property investments and can therefore benefit millennials.
REITs are listed and traded on stock exchanges, and investors can purchase units through a Demat account. Investors can also explore IPOs to make the most of new REIT launches.
REITs let investors gain money through real estate investment without worrying about owning or managing physical properties.
Real estate investment trusts (REITs) pay dividends to investors as per their earnings. Publicly traded REITs come with the risk of losing value in case interest rates rise. Also, there is a risk of losing money on non-traded / non-listed REITs which can be difficult to research.
REIT investments are similar to any other form of investment that comes with its set of benefits and risks. Investors must carefully explore the available REIT options before making an investment decision. It is wrong to assume that REITs will always provide positive returns, since these too are influenced by many market factors.
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