Real Estate Investment Trust (REIT)

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REIT acronym for “Real Estate Investment Trust” are those entities that own, operate or finance income-generating real estate properties. REITs may own different types of properties such as commercial real estate i.e. offices, apartments, warehouses, shopping centers, hospitals, data centers, retail centers, hotels, and others. Most REITs may specialize in a particular type of real estate whether residential, retail, industrial, or any other while some REITs portfolio may include multiple types of real estate.

REITs have a clear business model wherein they collect revenue in the form of rental income by leasing vacant spaces to tenants. Income garnered is again distributed among shareholders in the form of dividends. Notably, it is mandatory for all REITs to payout 90% of their taxable income asdividends to shareholders. However, as it is a tax-deductible expenditure for the purpose of corporate taxable income, therefore, in practice, most REITs prefer to payout 100% of their taxable income to shareholders.

Thus, by this way, investment in REIT funds enables investors to get a share in business income produced through renting out real estate properties without any requirement to actually purchase. Embassy Office Parks IPO was India’s first REIT IPO launched in 2019.

If you’re looking to invest in REIT IPO then Mindspace Business Parks REIT IPO is available to you that is expected to open from 27th July 2020 to 29th July 2020.

REITs and InvIT

    REITs and InvIT (Infrastructure Investment Trust) both are a great substitute for the physical real estate properties. REITs are somehow similar to InvIT because they both invest in real estate properties and general rental income from the same with an only difference is that REITs operate in commercial real estate, however, Infrastructure Investment Trust, as the name itself, only invests in infrastructure projects i.e. Roads, highways, etc.

Key facts about REITs investment

  • On 23rd April 2019, market regulator, SEBI, reduced the REITs minimum investment requirement from Rs. 2 lakh to Rs. 50,000. Thus, anyone who wants to participate in REIT investment must invest the minimum subscription capital of Rs. 50,000.
  • SEBI has set the minimum trading lot size to invest in REIT IPO is 100 units.
  • REITs may be listed or unlisted, for listed REITs minimum trading investment is set to Rs. 1 lakh. Interested investors can buy or sell REITs through their brokers.
  • As per SEBI REIT Regulations, 2014, in order to qualify for REIT, their investment is completed and income-generating real estate properties should not be less than 80% of their assets. In other words, REITs can’t have more than 20% of their assets invested in development properties, mortgage-backed securities, debt, government securities, money market instruments, cash & cash equivalent securities, etc.
  • REITs must generate at least 75% of their income from real estate sources. rental income, interest on mortgages financing real estate property, or others.
  • Service fees or revenue from non-real estate property should not contribute more than 5% to the total REIT’s income.
  • REITs allow investment in commercial real estate properties only.

Why invest in REITs?

Investment in REITs comes with several advantages that are listed below:

  • Portfolio diversification: Investing in REIT helps investors to diversify their portfolio within the real estate market with having low correlation to other asset classes such as equity, debt, etc.
  • High Dividend yield: As said earlier, it is the regulatory requirement for REITs to distribute at least 90% of their taxable income among shareholders. Thus, REIT can be an excellent choice for investors to enjoy solid earnings from dividends.
  • Risk management: Risks for REIT investment are distributed among all investors rather than sole property owners
  • Liquidity: Buying and selling physical properties can take time whereas REIT investment comes with greater liquidity.
  • High regulations: REITs in India have to comply with the SEBI Real Estate Investment Trust Regulations, 2014.
  • Transparency: REITs have to report their financial information and disclose all the material facts and risks information that provides full transparency to investors to help them decide whether to invest or not.

REITs Investment Cons

REITs are also associated with several drawbacks that are enlisted below;

  • Interest rate risks: REITs investment has significant exposure to interest rate risks, in an environment with a rising interest rate, REITs can be a bad investment.
  • Property specific risks: Although investment in REITs drives diversification benefits, however, they are also subjected to property-specific risks. For instance, economic sensitivity, recession or another economic downfall can significantly affect hotel REITs investment.
  • Limited growth: REITs distribute 90% of their earnings as dividend hence have only 10% in hand that can be reinvested back in the business for growth.
  • Taxable Dividend income: Dividend earned from REITs investment is not tax-free in the hands of shareholders, and will be taxed at a marginal tax rate.
  • High fees: REITs may be subject to high transaction fees and high management fees, which in turn, results in lower payout for investors.

REITs Investment Conclusion

    Undoubtedly, investment in REITs can be a great alternative for investors who want to earn good dividend income or want to diversify their portfolio, but they must be aware of the risks associated with such as interest rate fluctuation, property-specific risks, and many others. Hence, REIT investment decisions must be made after weighing costs associated with the expected benefits.

Last updated on 25th Jul 2020

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FAQs

  1. 1. What is REIT (Real Estate Investment Trusts)?

    A real estate investment trust is a company that owns, runs, and manages real-estate-related properties i.e. residential properties, commercial properties, malls, healthcare centers, industrial parks, offices, hospitals, and others. REITs lease out these properties and generate rental revenue from the same.

     

  2. 2. What are the difference between REITs and InvIT?

    Real Estate Investment Trusts (REITs) that owns, operates, and manages real estate properties i.e. offices, industrial parks, data centers, healthcare centers, medical facilities, warehouses, and many others from where it generates rental income.

    Unlike it, Infrastructure Investment Trusts (InvIT) companies pool money from investors and invest it in infrastructure projects only such as highways construction, road constructions, bridges, and others to generate regular cash flow.

    Letís find out more about REITs and InvITs here as under

    Difference REITs InvIT

    1ncome Certainty

    Highly certain because minimum 80% is to be generated from income deriving properties.

    Less certain because there is no such condition and dependency over capacity usage and scalability.

    Regulatory requirements

    SEBI Real Estate Investment Trust Regulations 2014

    SEBI Infrastructure Investment Trust Regulations 2014

    Liquidity

    High due to less minimum capital subscription requirement

    Less due to high trading lot size

    Minimum subscription requirement

    Rs. 50,000 is the minimum subscription requirement to invest in REITs.

    InvITs have high minimum subscription requirement as it needs Rs. 1 lakh investment.

     

  3. 3. How to make money from REITs investment?

    REITs general rental income from properties and also in the form of capital gain. They again distribute 90% of their earnings as dividends to shareholders.

     

  4. 4. What are the benefits of REITs investment?

    One can enjoy a number of benefits by investing in REITs, here’re some of the key advantages associated with REITs;

    • High dividend yield as REITs payout 90% of their total taxable earnings as dividends to shareholders.
    • Investing in REITs helps to diversify a client’s investment portfolio.
    • Tradable securities; Listed REITs can be traded on the stock exchanges similar to stocks, and other tradable instruments.
    • High liquidity: Buying and selling of REIT investment instead of physical properties are comparatively highly liquid.
    • REITs are strongly regulated by SEBI REITs regulations 2014.
    • Less minimum subscription capital requirements avail small investors to undertake investment in REITs.
    • Disclosure of financial information and other important business facts provides transparency advantages.

     

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  2020-07-21T01:18:15+00:00






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