Real Estate Investment Trust (REIT): How it Works?

Tamir Sapir, a business mogul said, “If you are not putting your money in real estate, then where else?”

This quote can easily resonate with investors who can’t get enough of real estate investments and REIT stocks. Investors can have it all with REITs. Purchasing a share of a real estate investment trust (REIT) or a REIT fund entitles you to a portion of the trust’s real estate holdings and earnings. These shares are securities that are traded on significant stock exchanges, so you don’t have to perform any of the effort involved in real estate investing or go to closings.

In the United States, REITs were first developed in 1960, and the first REIT was launched on the New York Stock Exchange in 1965. The Securities and Exchange Board of India (SEBI), first introduced REITs in 2007.

Indian investors are increasingly interested in investing in commercial real estate. To receive enticing returns on their investments, both resident and non-resident Indians (NRIs) are interested in corporate real estate (CRE) holdings. Although commercial real estate is often priced between Rs. 20 and Rs. 30 crores, private investors can still purchase such properties through fractional ownership, which starts at Rs. 25 lakh, or Real Estate Investment Trusts (REIT), which start at less than Rs. 50,000.

Let’s examine how Real Estate Investment Trusts operate in India, their benefits and drawbacks, and whether they are beneficial to real estate portfolios.

What Is a Real Estate Investment Trust (REIT)?

A Real Estate Investment Trust (REIT) is an entity created to direct investable assets toward the ownership and management of the real estate that generates income. The portfolios of commercial real estate, such as offices, warehouses, shopping malls, and hotels are managed by REIT companies. REITs work similarly to mutual fund companies and give all categories of investors the chance to own a piece of real estate.

Companies that specialise in real estate investment trusts pool the funds of numerous investors and use those funds to purchase properties with income potential. REITs rent out properties to create profit from rental income and capital growth. Dividends are a recurring source of income for investors as well.

How Does a Company Qualify as a REIT in India?

To qualify as a Real Estate Investment Trust, a corporation must adhere to Section 4 of the Regulations and the SEBI guidelines. These qualify as key features of REIT –

• According to the Registration Act of 1908, the trust agreement needs to be registered as a deed.
• 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 requirements listed in Schedule II of the 2008 SEBI (Intermediaries) Regulations must be met by the parties to the REIT.
• The business must have at least Rs. 500 crore in assets.
• REIT requires a board of 100 investors minimum.
• In any given tax year, no fewer than five people should hold 50% of their share.
• A minimum of 75% of investment assets must be real estate.
• The Real Estate Investment Trust should invest at least 95% of its total income.
• In assets that may generate income, 80% of the corpus should be put to use. Construction assets are only allowed to contribute up to 20% of the overall investment.

Types of Real Estate Investment Trusts (REIT)

In India, there are six distinct types of REITs, depending on the industry they operate in and whether they are private or public companies. The list of several REIT types is as follows:

Which are the Most Popular REITs in India in 2022?

There are three popular REITs in India for 2022. The following table showcases the 52-week share price for each REIT for 2022 – 

Who Should Invest in REITs?

Without actually needing to purchase commercial real estate, REITs offer a mechanism for private investors to partake in the revenue generated by such ownership.

Real estate investment trusts (REITs) are a smart way to transform investments and safeguard them from inflation. Real estate investment trusts are thus a possibility for investors looking for alternatives to equities and bonds.

The minimum investment has significantly decreased to Rs. 15,000 as a result of SEBI’s recent restrictions. Additionally, the lot size from 100 units is down to one unit. Therefore, investors who can afford to invest this sum are encouraged to do so.

It provides consistent income in the form of dividends. Consequently, investors searching for consistent returns may wish to invest in real estate investment trusts. Given that REITs are long-term investments, individuals searching for a long-term investment alternative can consider REITs as an option.

Pros and Cons of Investing in REITs

Investable assets are directed toward the ownership and management of income-generating real estate through REITs. The following are the pros and cons of investing in REITs – 

Pros of REIT Investments

Diversification

REITs are useful assets for diversifying one’s investment profile. Without the inconvenience of purchasing and managing any commercial property, they require real estate prominence. Consequently, they are an investment vehicle that one might consider for diversification in addition to the usual asset categories of equities, debt, and gold.

Low Investment

Investments in real estate are typically more expensive and capital-intensive. They are an excellent replacement for high-end investments. REITs require an initial investment of about Rs. 10,000 to Rs. 15,000. Hence, with minimal initial capital, you can increase your real estate investment portfolio.

Professional Management

The fact that a REIT is a trust, organisation, or corporation means that they are driven by professionals. Thus, managing commercial assets is not something you need to be concerned about.

Consistent Source of Revenue

For REITs, rent is a source of income. It provides interest and dividend payments to investors that are equivalent to 90% of the rental income. As a result, investors can rely on a steady return on their investments.

High REIT Capital Profits

Publicly listed REITs are valued according to how well they perform. Consequently, a profitable REIT may increase in value with time, permitting investors to sell it. After that, the investor can profit from their investment income.

Cons of REIT Investments

Limited Options

REITs have recently entered the Indian marketplace. Thus, only a handful of options are now attainable, which limits the investor’s options.

Low Liquidity

Despite being placed on the stock market, only a limited fraction of investors participate in REITs. Moreover, it could be challenging to dissolve REIT assets during a recession.

Taxation on REIT

Every interest or dividend income earned from REITs must be paid in full by the investor. The REIT’s income will be counted toward taxable income. Moreover, the relevant tax rates will be applied.

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Real Estate Investment Trusts (REIT) Fraud

Investors should exercise caution when dealing with anyone trying to deal with REITs that aren’t registered with the Securities and Exchange Commission (SEC), as advised by the SEC committee. It suggests using the SEC’s EDGAR system to check the listing of publicly-traded and non-listed REITs. A REIT’s quarterly and annual reports, and offering brochure, can all be viewed through EDGAR.

Researching brokers or investment advisors who recommend Real Estate Investment Trust is another smart move. An investment professional’s registration and licence status can be checked using a search tool provided by the SEC.

How to Invest in Real Estate Investment Trusts?

In July 2021, the minimum investment for a REIT was Rs. 50,000. However, currently, the minimum investment amount is between Rs.10,000 and Rs.15,000 following SEBI’s regulatory notice. In the same SEBI regulation, the minimum lot size for REITs was also decreased from 100 units to 1 unit.

The procedure for investing in REITs is simple. There are various ways to invest in REITs with the following steps to keep in mind –

REIT Investing Via Stock Exchanges

REITs are sold and registered on stock markets, much like Exchange Traded Funds (ETF). As a result, if a shareholder has a Demat account, buying REIT units is simple. Depending on how popular REIT units are on the stock exchanges, their price may fluctuate. The success of the REIT has an impact on prices as well. Currently, Brookfield India Real Estate Trust, Mindspace Business Park REIT, and Embassy Office Parks REIT are the three REIT options available in India.

REIT Investing Via Mutual Funds

Real estate exposure is fairly limited in India because there are relatively few local mutual funds that invest in REITs. Mutual funds can be used to invest in REITs as well. Kotak International REIT Fund, which primarily invests in international REITs, is a good option for Indian investors seeking exposure to the global real estate market.

REIT Investing Via Initial Public Offerings (IPO)

Investors can monitor for REIT IPOs and purchase shares after they are listed. This necessitates an in-depth investigation and comprehension of all REIT risk elements. Investors must sit tight for the following IPO to be conducted since the Indian REIT business is still developing and there are only a handful of REIT options available.

REIT Investing Via Brokerage

1. To invest in a Real Estate Investment Trust, one must create a brokerage account. Alternatively, if a company retirement plan allows for the purchase of REITs, one can consider investing in them. To learn about the various REIT investments, consult with the respective chosen plan administrator.
2. Personal and basic contact information such as a social security number and a valid ID is required. One will be prompted for some extra information regarding earnings, profession, and prior investment knowledge.
3. Based on the broker selected, one can enrol either online through a website or mobile app or in person at an office location.
4. Utilise the education and research resources at one’s disposal after the account is set up and accessible online to start evaluating potential REIT investments. A screening tool that can help users hone their research and selection should be included in the brokerage account.
5. When users determine which REIT investment best suits their needs and objectives, they can move on to make an online purchase.
6. Before proceeding, be aware of the types of fees that the broker may impose as well as the fees and expenses related to the investment itself. 

One should routinely examine their REIT investment, just like one should with their other investments.

Conclusion

Investing in REITs has multiple benefits. They can be a reliable source of revenue because they are more fluid than tangible properties. They give you a hedge against stock market fluctuations and gain and devaluation together with the wider real estate market. Do your homework before making a REIT investment. To determine whether REITs should be included in your portfolio, speak with a financial professional.

However, owning your investment property may be a wiser course of action if you don’t believe investing in a REIT is the best course of action for you.

FAQ’s about REIT