Owning a house or a residential property has been long considered a sign of financial success and affluence in India. So, it is not surprising that real estate forms an important and often sizable part of every financial portfolio. But over the past few years, there has been a significant shift in how banking, finance, and investments work. Most of our assets, such as shares and bonds, are now digital. We have even started investing in gold bonds and EFTs rather than buying physical gold. Real estate investment, too, has started taking its early steps towards going digital.
Real Estate Investment Trusts (REITs)
Real estate investment trusts are similar to mutual funds. However, most real estate assets, such as commercial properties, warehouses, and office spaces, are expensive and nearly out of reach for individuals. REITs collect funds through investments from retail and institutional investors and buy real estate assets such as shopping centres, co-working spaces, offices, and showrooms. These are rented or leased, and regular rental income is generated. The trust sponsor earns a percentage of this income, and the major proportion is distributed to the investors. This income is similar to the dividend income of equity investors.
In India, real estate is always in demand, and the price of properties can be expected to keep appreciating for a long time. This represents the asset appreciation of the REIT investor’s fund. Moreover, commercial spaces command a higher rental yield than residential real estate, and this ROI makes REIT a worthy investment. Here it is important to remember that the investor does not hold any property in his/her name but simply invests in the trust that owns these real estate spaces.
Types of REITs
There are different ways to classify REITs. For example, they may be classified by their listing status. So, REITs may be Private, Publicly Traded, or Public but not listed. Private REITS are not registered with SEBI or listed on the stock exchange and are outside SEBI monitoring. These are very high-risk investments and have limited investors. Publicly traded REITs are listed on stock exchanges, and their functioning comes under the ambit of SEBI jurisdiction. Public REITs may also be SEBI-registered but not be open to public trading on any stock exchange. By far, the best way to classify REITs is by their investment. So, you can invest in an Equity REIT or a mortgage REIT. The former owns real estate assets and earns rental income, while the latter lends money in the form of mortgage loans and earns interest on these.
Reasons why REITs are a good investment
- Affordability – REITs allow the common man to invest in large and expensive commercial spaces. It leverages the power of collective investing and makes a regular rental income possible. So with low investment, the investor can own a high-value asset.
- Investment Vs Debt - One of the greatest advantages of REITs is that they make real estate investing possible without going into debt. The average investor who wants to buy a residential property can only afford a downpayment and approaches a bank or lender for financing. The term for such loans runs into decades. Conversely, REITs offer the opportunity to own (collectively) and invest without going into debt.
- Income – Investing in REITs is a great way to develop a regular income stream. In India, real estate trends have largely favoured the investor, meaning that the value of properties has only risen over time. Rental yields, too, have only been on the uptick. REITs are a good way to make your money work for you.
- Liquidity – One of the greatest challenges of real estate investing is the lack of liquidity. This means that when you want to sell your asset and liquidate your investment, you may not be able to do so immediately. REITs, particularly publicly traded ones, offer high liquidity and safety.
- Management – REITs are professionally managed funds and free the investor from the need to verify title deeds, documents and permits, and a host of legal hassles. The sponsors are professionals who undertake thorough research while investing in real estate assets.
- Security – In India, REITs are required to distribute 90% of the income generated to investors. So while the fund managers earn a share of the profit, the investor avails the bulk of the returns. Investors also similarly share market risks.
Things To Consider
Like all other investment options, REITs, too, are subject to market fluctuations and demand. So there is no assurance of profit. The interest or dividend income is taxable according to the applicable rates. In India, REITs are still in their infancy, and there may be limited options for an investor to choose from. It is always a good idea to consult a financial expert before investing in REITs.
