Know all about Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) or real estate investment trust in India are companies that own, operate, or finance income-generating real estate across sectors like commercial office spaces, malls, and industrial properties. They offer investors a way to invest in large-scale, income-producing real estate without directly owning or managing the properties. Modeled after mutual funds, REITs historically have provided investors of all types regular income streams, diversification and long-term capital appreciation. Investors can purchase stock in equity REITs and mortgage REITs. Equity REITs own properties in a variety of real estate sectors, such as retail, office and residential.
How does REITS work?
A REIT is set up in the form of a trust registered with Securities and Exchange Board of India (SEBI). The sponsor or the investor who creates the trust, transfers ownership of the properties to the REIT in exchange for units. The sponsor holds a certain minimum percentage of the total units and makes an Initial Public Offer (IPO) of remaining units within three years to get REIT listed on the stock exchange. Post issuance, investors hold the REIT units just like mutual fund units.
Key Aspects of REITs in India:
Structure and Operation:
- REITs pool investor money to buy or finance income-generating real estate.
- Investors can buy shares of the REIT, similar to buying shares of a stock.
- The income generated from rents or sale of properties is distributed among shareholders.
- REITs must distribute 90% of their income as dividends to shareholders.
SEBI Regulations:
- The Securities and Exchange Board of India (SEBI) regulates REITs.
- A REIT in India must invest at least 80% of its assets in completed and income-generating properties.
- The remaining 20% can be invested in under-construction properties, mortgage-backed securities, or other real estate-related assets.
- A REIT must be listed on stock exchanges, providing liquidity to investors.
Types of REITs:
- Equity REITs: These own and operate income-producing real estate properties. In India, most REITs fall into this category.
- Mortgage REITs: These lend money directly to real estate owners or invest in real estate-backed securities. These are rare in India.
- Hybrid REITs: A combination of both equity and mortgage REITs, though not common in India.
- Private REITs – These trusts function as private placements, which cater to only a selective list of investors. Typically, private REITs are not traded on National Securities Exchanges and are not registered with the SEBI.
- Publicly traded REITs – Typically, publicly-traded real estate investment trusts extend shares that are enlisted on the National Securities Exchange and are regulated by SEBI. Individual investors can sell and purchase such shares through the NSE.
- Public non traded REITs – These are non-listed REITs which are registered with the SEBI. However, they are not traded on the National Stock Exchange. Also, when pitted against public non-traded REITs, these options are less liquid. Plus, they are more stable as they are not subjected to market fluctuations.
Popular REITs in India:
- Embassy Office Parks REIT: One of the largest, focusing on commercial office spaces.
- Mindspace Business Parks REIT: Invests in premium office properties.
- Brookfield India Real Estate Trust: Focuses on large-scale, quality commercial properties.
Why Invest in REITs?
REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation. Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.
- Diversification: REITs provide an alternative to traditional equity or bond investments.
- Stable Income: Regular dividend payments due to mandatory distribution of 90% of rental income.
- Liquidity: REITs are traded on stock exchanges, making them more liquid than directly owning real estate.
- Access to Institutional Quality Assets: Retail investors can invest in large real estate properties that are otherwise hard to access.
Risks Involved:
- Interest Rate Risk: Rising interest rates may affect the borrowing cost of REITs, reducing profitability.
- Market Risk: Like stocks, the value of REIT shares fluctuates with market conditions.
- Concentration Risk: Many Indian REITs are concentrated in commercial office spaces, making them vulnerable to downturns in that sector.
How to Invest in REITs in India:
- Direct Investment: You can buy REIT units through stock exchanges like BSE or NSE, just like equities.
- Mutual Funds/ETFs: Some mutual funds and ETFs offer exposure to REITs.
Conclusion:
REITs in India are a relatively new but growing investment option that offers exposure to real estate with the benefits of liquidity and diversification. They are especially attractive for those looking for regular income through dividends and an indirect way to invest in high-quality real estate projects.
Please note,
The views in the article/blog are personal and that of the author. The idea is to create awareness and for educational purpose and not intended to provide any product recommendations.
