What is REIT?
The idea behind Real Estate Investment Trust – REIT is similar to that of a mutual fund, investors with less knowledge and reasonable capital take the help of mutual funds to enter the stock market and debt market.
Something similar happens in REITs as well, investors who wish to invest in real estate but have limited capital or do not want to buy the source are having an exclusive option to invest in REIT and enjoy regular income as a dividend or capital appreciation in future.
The real estate sector is one of the expensive investments that require a good amount of capital for purchasing a property that infuses a lot of patience in saving the bucket of any middle-class consumer in India.
Real estate investment trusts are companies that own, operates or financially invest in real estate projects that are capable of profit production.
These trusts hold the money of individuals who wish to gain from real estate projects, the investment amount of all interested individuals are pooled together by the REIT.
REIT then collectively invests in real estate products like apartment buildings, cell towers, data centres, hotels, medical facilities, offices, retail centres and warehouses. The investors have the liberty of investment amount without any baggage of owning the property or to look after it.
REITs are considered as investment instruments with medium liquidity as most of them can be publicly traded in investment markets.
Types of REIT
Private REITs as the name suggest are privately owned investments pooled by a few individual investors. These are generally pooled by large size investors or companies.
The portfolios for these REITs are diverse set according to the private goals of the club of investors. Being private REIT, these are not much liquid and are not traded on NSE or BSE. Noting the nature, they are not required to be registered on SEBI.
Securities and Exchange Board of India (SEBI) is a regulatory body established by the Government of India to regulate the securities market in India and protect the interests of investors in securities.
Publicly traded REIT
These REITs investment proceeds through NSE or BSE trading just like shares. They are majorly secured and safe as they are registered under SEBI and work on digital platforms. Being highly liquid, entry and exits are easier.
Public non-traded REIT
They are secured REITs as are registered with SEBI but do not provide much liquidity because of the non-trading aspect. Stability in investments is achieved because of fewer price fluctuations. The portfolio differs for every REIT goal and investment size.
Portfolio options for REITs
Retail and equity
Rental income is generally the main source of revenue that is shared with the holders of the scheme. These income streams are generated through commercial properties such as shopping malls, offices or any commercially used plot.
This REIT is termed to be the popular one due to its rental aspects and commercial use that will ensure profits through regular working.
Future for this REIT sounds a bit vague due to the digital transformation of business and retail that has significantly been viewed in opposition to the demand for commercial rental properties.
In India, properties are widely used for mortgaging and picking up loans. Such needs of the business are addressed by “mREIT” that take up the mortgaged estate by giving in loan incentives to businessmen.
The income stream from such investments is in terms of interest over lending. This type of REIT is prone to risk when interest rates are high in an economy where the borrower tends to pay back as the cost is high or sometimes may default in income.
Hybrid REITs help in risk aversion by diversification in mortgaged and retail property investments. It is a mix of both styles that helps in comparatively safer return. Rental income along with interest income together build the sharing gains.
Residential investments through REITs prove to be a good option when comes to long term gains through investments. The REITs aim at projects that are undergoing big size apartments generally modern societies that cater to urban development.
Infrastructure projects dealing with healthcare facilities are one of the safe investments because of the nature of use and regular income stream. The investments through REITs in healthcare needs with real estate provides for streamlined gains even if small in proportion.
How to invest in REIT?
At present any investor can enter the REIT market via three options :
This is same as the working of normal stock market, where anyone can buy or sell the stock of REIT via simple electronic transactions or broker.
Mutual funds that aim at investing the portfolio in REITs give a better incentive for investors who want to bear very small risk and have less hands-on with investment thinking.
By this way of trading, one can have an indirect share in the property and enjoy the gains.
Currently, 3 REITs allow investors to invest in India. Namely, Embassy Business Park REIT, Mindspace Business Parks REIT and Brookfield India REIT.
Points to notice are that the minimum individual investment allowed to enter the REIT market is ₹10,000 to ₹15,000 as per SEBI. Also, the lot size for the issue of shares through Initial public offering (IPO) or Follow On Public Offer (FPO) is a minimum of 1 unit that has made the market more accessible to small investors.
How REITs are given recognition?
According to the Indian regime set of regulations that are looked up by SEBI and the government of India for the formation and operations of REITs.
Some of the important criteria via which a REIT can be formed are :
- The company has to be a registered business trust or organisation.
- They should allow REIT to be in the form of fully transferable shares.
- Before establishing in operations, REIT must have a minimum of 100 shareholders.
- REIT has to distribute at least 90% of taxable income as dividends to shareholders.
- Less than 5 members are not allowed to hold more than 50% of total investment in a financial year.
- A minimum of 75% of investment assets must be in real estate.
- A minimum of 95% of REITs total income should be invested.
Direct real estate investing and REIT
Big analysts and investment experts have their votes inclined towards REITs as compared to direct investment because of incentives they provide over direct investments. These benefits can be compared on several grounds given below :
REIT investments are more liquid as they are transferable and most of them are in the form of shares that can be traded on NSE or BSE. This gives the utmost liquidity to the investor.
In contrast with REIT, direct investments in real estate are rigid as once the amount you part off to purchase any property, you are bound to liquidate the asset via selling or finding rental income for it.
Ease of access
It is very easy to access REIT via open markets and any individual investor has no restrictions of entry or exit. Income being regular through dividends provides an extra cover of income security.
Whereas in the case of direct investment in real estate, a buyer has to search and analyse every aspect of respective investment property on their own and has to plan out the operations for returns.
In case of REIT, the trusted team has a more educated and experienced team to handle the portfolio for maximum returns.
The most important factor is capital investment, in case of real estate investment capital amount needed is very high for individual investors, which takes up ages to collect and save by any middle-class family for investment returns.
In case of REIT, the same middle-class investor can invest in any small or big amount at his convenience without spending ages of savings for returns.
Gains and taxation
Capital gains of direct real estate can only be exercised at the time of selling of the property asset. Generally, people do not sell the property assets for gains but use the asset for a mortgage that means the asset remains in value.
But REIT gives room for gains and regular income in terms of secured shares all for the lifetime of investment.
One benefit of taxation is that tax can be indexed on gains of REIT but no such provision holds true for direct real estate investments.
Risk is pooled when capital is pooled, therefore the risk is shared among all shareholders of REIT depending upon their investments. This is not the case with individual direct investment in properties. The person holding the property has to bear any losses or theft alone.
Things to keep in mind while investing
It is very important to assess the reliability of REIT before investing and knowing the objective of REIT. By assessing reliability we mean to see the company, its general financial portfolio with regards to investment efficiency, public reputation and operational efficiency.
The goal of investment also matters, like if you want to go for short term investment you will seek small infra projects under REIT as they will generate revenue in lesser time than the long term projects.
Preference of REIT largely depends on an income stream that is the type of gains in form of dividends or capital gains. If you want a regular income you would prefer the REIT that allocates more ratio for dividends than reinvestment. And opposite for long term investors whose aim is to maximise capital gains.
REITs have to be judged upon the type of assets they are investing in. For example health infra or residential infra investments or even the mortgaged and hybrid modes. The diversification varies for investment size and allocation with geographical aspects.
Mutual funds or Electronic Funds Transfer (EFTs) are considered as the best options to enter the trade in REITs as they have financial managers and full responsibility for researching for best returns incentives. Whereas another option can be stock purchasing that can be assessed individually by portfolio adjustment.
Tax on income from investment through REIT for any individual investor is subjected to cash flow part of regular income. Once the investor sells off his/her share before 3 years, it will be considered a short term investment and therefore taxed at 15%.
In contrast to short term investment, if the investor sells off share after 3 years, his/her capital gains that exceed ₹1 lakh are taxed at 10% if no indexation is opted.
Whereas if the option for indexation is chosen , then the investor is entitled to pay 20% on the net income after deducting appreciation in cost over the period of time.
Indexation simply means adjusting with respect to inflation and wage accommodations in prevailing economic conditions. This benefits the investors in saving tax by adjusting income.
Advantages of REIT
Regularity of income
The income through investment is regular via dividends and hence a cash flow stream is generated.
You can easily use REIT shares to diversify your investment portfolio to gain long term gains and shared risk.
All the procedures are transparently done via digital platforms and regulated under SEBI which gives a safety net from frauds.
As we have talked much about how easy it is to convert your REIT investment into cash, we can observe the high liquidity for investors.
The cost of transactions and investments is very low as compared to traditional investments and is subjected to present stamp duties only.
Disadvantages of REIT
As REIT depends on market fluctuations the risk of high or low stock prices remains uncertain and cannot be aversed.
Low capital appreciation
Capital appreciation for the real estate sector is very low in the short-run or medium run, therefore investors of this category are not able to enjoy such capital appreciation.
Interest rate sensitivity
The REIT are sensitive to prevailing interest rates as the requirement of real estate and rental properties largely depends on the interest rate. Even for mortgaged investment, interest rates play an important role.
Limited options in our country
As only 3 REITs are allowed to function on NSE or BSE, this becomes a limitation to choose from the small pool of options.
After much research on the basics of Real Estate investment trust, we can now understand the mechanism involved in trading and how easily one can access the opportunity.
The capital requirements and liquidity features have made this investment technique a better place for real estate enthusiasts. Not just the benefits are attractive but the gains and risk aversion makes the REIT investments popular and worth entering.
Importance has to be given to all the factors before moving into the REIT space to guard ourselves against any unnecessary risk of losses and frauds. Investment can yield returns only when you dive into the depth of the instrument.