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Real Estate especially residential real estate has been a popular investment among Indians. In part because of the tax benefits that home loans provide under Section 80C and Section 24 of the Income Tax Act. However, investors can make lucrative investments in commercial real estate too, however this can be quite expensive and there are no tax benefits for the same. One way to make such an investment without actually owning expensive commercial property is through a Real Estate Investment Trust (REITs).
In this blog, we will discuss what Real Estate Investment Trusts definition is, how they work, how to invest in REITs in India and more.
What are Real Estate Investment Trusts (REITs)?
Real Estate Invest Trusts (REITs) are defined a type of alternative investment fund that pools money from multiple investors with the purpose of financing, owning and operating income-generating real estate. Investors can purchase and trade units of REITs on the stock exchange in real-time similar to exchange traded funds (ETFs) in India.
In case of a REIT, the underlying asset of the scheme are real estate properties that generate income through rent and mortgage income. This income is subsequently distributed to investors in the form of dividend or investors can sell REITs units on the stock exchange for a profit in order to get return on their investment. Additionally, REITs units can be purchased with an initial investment starting at as low as Rs. 25,000 making it a more viable option that expensive purchase of commercial property.
Types of REITs in India
There are various types of REITs available in India based on the type of real estate holdings the trust invests in. Below are the different types of REITs that you can invest in:
Office REITs
This type of real estate investment trust primarily invests in and operates office property. The main source of income for this type of REIT is the rental income obtained from leasing office space. This is the most common type of REIT available to Indian investors.
Retail REITs
The main underlying asset of a commercial REIT are commercial retail spaces like malls and standalone retail shops. Income sources for this type of REIT include rental income from let out shop spaces.
Residential REITs
If a Real Estate Investment Trust primarily investments in housing real estate like apartment buildings, residential complexes etc., it is known as Residential REIT.
Healthcare REITs
If a trust is primarily engaged in owning and operating healthcare facilities like hospitals, clicks, diagnostics centres, etc. it is called a Healthcare REIT. The main source of income for such trusts are the profits generated by these healthcare facilities.
Mortgage REITs
Unlike other types of REITs mentioned here, the primary investment of a mortgage REIT is in mortgages used to fund residential or commercial real estate instead of direct ownership of real estate. For these trusts, the main source of income are the interest earnings from the mortgages funded by the trust.
How do REITs In India Work?
A clear understanding of how Real Estate Investment Trusts in India are structured and operate is essential to help you decide if they are a suitable investment for you. Real Estate Investment Trusts in India are structured similar to mutual funds in India as both investment options allow multiple investors to pool their investments and the funds thus collected are professionally managed by a designated Manager of the REIT in accordance with SEBI (Securities and Exchange Board of India) guidelines approved in September 2016. Additionally, a REIT is also similar to Exchange Traded Funds (ETFs) in India as units of both investments can be registered and traded on stock exchanges.
When a real estate company decides to create a Real Estate Investment Trust for buying, owning and operate real estate properties, the first step is the appointment of a Trustee who assumes Trusteeship of the assets of the trust. This way the real estate company becomes a sponsor and relinquishes direct control of the real estate assets. Typically, direct ownership of these assets is maintained through a SPV (Special Purpose Vehicle) that operates as a separate entity from the sponsor. However as per existing regulations the sponsor is required to maintain at least 50% or higher stake in the SPV thus created.
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The key components of the structure of REITs in India are similar to the 3-tier structure of different types of mutual funds such as:
Sponsor –
The real estate company who originally owned the assets that are now the underlying assets of the Real Estate Investment Trust.
Manager –
The primarily responsibility of the REITs manager is the ensure that the assets of the trust are managed in order to grow the assets and maximize profitability for the investors. This function is usually performed by a specialized facilities management company.
The key components of the structure of REITs in India are similar to the 3-tier structure of different types of mutual funds such as:
Sponsor –
The real estate company who originally owned the assets that are now the underlying assets of the Real Estate Investment Trust.
Manager –
The primarily responsibility of the REITs manager is the ensure that the assets of the trust are managed in order to grow the assets and maximize profitability for the investors. This function is usually performed by a specialized facilities management company.
Trustee –
The key function of the Trustee is to ensure that the assets held in Trusteeship are managed in accordance is SEBI guidelines and the interest of investors is protected.
Once the structure and assets of a Real Estate Investment Trust have been specified, the REIT has to be registered on a stock exchange in India and its assets divided into units like mutual funds. Then these REIT units are made available to the general public through an IPO or Initial Public Offering. After the IPO these units can be exchanged on the stock market similar to ETFs and equity shares.
How to Invest in REITs in India?
Investment in REITs mandatorily require a demat account in India. Additionally, you will also need to have access to a trading account through a broker or brokerage firm. Investors can also choose between a discount broker or a full-service broker. The latter is more expensive but also would provide advice regarding which REITs to invest in. A discount broker, while less expensive, might be a good fit for you only if you are well-versed regarding how financial markets work.
In order to make such financial transactions, you will also need to complete the applicable Know Your Customer (KYC) requirements by providing key KYC documents like Aadhaar, PAN, etc. Another requirement to consider is the minimum investment amount that is required. Currently the minimum number of REIT units you need to buy in India is 1 unit and the minimum investment required is between Rs. 10,000 and Rs. 15,000 for a lump sum investment.
How do REITs Provide Returns to Investors?
In India investors can get income from REITs in 3 ways – interest, dividend and capital gains. Here is how it works:
Interest:
This income to investors is the income generated by the SPV from of income generated by the financial holdings of the REIT and rental income obtained from real estate tenants.
Dividend:
A portion of the income earned by the trust from its real estate holdings currently at least 90% of the total income needs to be distributed to investors as dividend income on a quarterly, half-yearly or annual basis.
Capital Gains:
An investor can sell REIT units on recognized stock exchange for a profit and get capital gains income from their investments. Similar to profits from increase in mutual fund net asset value (NAV).
Should You Invest in Real Estate Investment Trusts?
If you are looking to diversify your investment portfolio through exposure to real estate holdings, REITs are a good option due to the low cost of investment as compared to direct holding of real estate. Moreover, unlike typical real estate holdings, Real Estate Investment Trust units are more liquid as they can be redeemed with relative ease.
However, one needs to keep in mind that like other market-linked instruments, REITs also feature a significant level of risk depending on the performance of the stock market as well as the underlying real estate assets. So do consider applicable risks before seeking portfolio diversification through REITs investments.
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- Fixed Deposit Interest Rates
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Frequently Asked Questions (FAQs)
Q. Who can issue REITs in India?
REIT units in India are issued by the sponsor usually in collaboration with an asset management company. The REITs issued have to first registered on a stock exchange in India.
Q. What is the minimum investment required in REITs?
The minimum investment allowed in Indian REITs as of July 2021, is Rs. 10,000 to 15,000 with a minimum lot size of 1 unit.
Q. What is the key difference between direct commercial real estate investment and REIT investing?
When investing directly in commercial real estate, the investor would be able to invest in a limited number commercial properties due to the high initial investment involved. On the other hand, the investor would be able to invest in a diversified portfolio of commercial properties at relatively low cost through a REIT.
Q. Can REITs provide regular income?
While a REIT is required to periodically pay interest and dividend to its investors, this is not guaranteed. These payouts depend on the income generated by the trust and if the investment performs poorly, no income might be generated by the REIT. So, regular income is not assured from a REIT investment.
Q. Why invest in REITs?
Real Estate Investment Trusts give investors a unique opportunity to diversify their portfolio through real estate investments at a low cost with professional management, and without directly owning property. Additionally, you can make either systematic investment plan (SIP) or lump sum investments in REITs. This way, one can get the key benefits of investing in real estate without the hassles of having to maintain or manage the property or having to pay potentially hefty property taxes.
Sources:
https://economictimes.indiatimes.com/definition/real-estate-investment-trust-reits
https://www.ahlawatassociates.com/blog/reits-in-india/
https://www.etmoney.com/learn/personal-finance/everything-you-need-to-know-about-real-estate-investment-trusts-reits/
https://www.forbes.com/advisor/in/investing/how-to-invest-in-reits/
https://www.motilaloswal.com/blog-details/The-pros-and-cons-of-investing-in-REITs-funds../1852
https://www.livemint.com/money/personal-finance/3-things-you-should-keep-in-mind-while-investing-in-reits-11634572099076.html
ARN No : May23/Bg/08
