Real Estate Investment Trust (REIT) is a company or a special purpose vehicle (SPV) that owns or in most cases finances income producing real estate properties. Much like the mutual funds, REIT provides investors with regular income and diversification. A REIT collects money from the investors and invests the same in commercial real estate. It issues units to the investors that are later listed on the stock exchange.
REIT owns many types of commercial property ranging from office and apartment buildings like warehouses, hospitals, shopping malls and even timberlands. Some REIT also participate in financing of real estate. A REIT offers double benefit of rent yield (in the form of recurring dividends) and capital appreciation.
Benefits of REITs in India:
Liquid Investment: REIT operates like mutual fund investments. You can buy and sell units at your will, making it extremely easy to enter and exit. A traditional real estate investment in comparison is probably an illiquid investment. You may not be able to resell it when you really need the money.
Minimum Risk: REIT is less risky compared to investing in under construction property as they invest in fully built properties that generate income. Investing in REIT can generate direct income and prevent you from the pain of waiting for the physical possession or control of the property. REIT also limits the debt levels, thus reducing the high leverage risks associated with the real estate.
Low Entry Cost: As compared to the direct real estate investment, REITs have a low-entry cost. Based on the SEBI regulations, minimum investment in REIT is significantly lower than the minimum costs for the commercial properties in the urban areas.
Transparency” REITs improve transparency in real estate markets by disclosing information periodically such as average rents, occupancy rates, and tenant profile and buying and selling rates etc. The availability of this information reduces the irregularity of information usually seen in the real estate markets.
Tax Concessions: Tax breaks for REITs provide higher dividend payouts (dividends are tax free in the hands of shareholders). Investors are exempted from capital gains if they hold REIT units for more the 36 months. These tax breaks make REITs more attractive for small investors.
Diversification: In the long-term, REIT shows a little connection to the broader stock market. REIT provides small income investors with an opportunity to invest in commercial property that was possible only for wealthy individuals or companies. Investment in the REIT means an investment in a portfolio of real estate including IT parks, commercial office space, shopping malls that are spread across multiple cities allowing investors to earn stable returns with minimal risks.
Professionally Managed: REITs are managed by a group of qualified professional managers like they do in mutual funds where a full market research is conducted before buying, selling and renting decisions. Also, this is unlike individual investors, who do not have enough time and resources to conduct the full market research. Apart from this you also do not have to take troubles of managing tenants, collecting rent and maintaining the property.
REIT in India – Few things to Consider:
Management Fees: REIT includes several management fees like acquisition expenses, sales commissions, organization expenses, manager fee, etc.
Lower Returns vs Direct Investments: Considering the fees associated with the REIT investments, the returns may be lower than the actual commercial property investment. Though REIT may get you lower returns, its limited risks sort of compensate for that.
Market Volatility: Given REIT is listed on stock exchanges, it exposes them to the volatility of the market, and can drop significantly, if the broader market falls. In comparison, the price of the physical properties in India are more stable and generally increase in the long-term.
Lack of Control: The properties managed by the REIT lacks direct control over them unlike in the case of direct real estate investments. Over here, all the decisions of investments and property managements rests with the portfolio manager.
Recently, to make REIT popular among the masses, SEBI decided to relax some of the related rules including allowing REIT to invest a bigger proportion of their funds in assets under construction.
REIT is a good alternative investment channel, helping you to invest in real estate like you invest in stocks indirectly through the mutual funds. REITs have helped in the organization of real estate market in many countries. REIT as an investment vehicle is a highly popular and demanding investment vehicle in countries like the US whereas in India, the government and the SEBI are still in process to sort out some of the operational details.
REIT can play the much needed vehicle to bring transparency and professionalism and confidence in the Indian real estate industry. With increase in foreign and direct investment, we can expect high quality commercial real estate in India.