We’ve all heard stories from our parents and grandparents about how land used to be cheap back in the day. They talk about how easy it was to buy property, and how they wish they had bought more when they had the chance. And today, the value of real estate has skyrocketed. Real estate investments now require a massive upfront commitment, often touching crores. For many of us, investing in real estate seems out of reach because of the large amounts of capital needed to start.
But there’s good news – real estate investment trusts or REITs give you a way to invest in real estate without needing to pay a fortune. These investment vehicles allow you to get exposure to real estate by investing small amounts, and since they’re listed on the market, they’re also more liquid and accessible. Through reit investing, you can enjoy the benefits of real estate without the hassle of owning physical property.
What are Real Estate Investment Trusts (REITs)?
Real estate is a powerful investment that can help you generate a fixed income through rent and appreciation over time. The cost of real estate investments, however, is the barrier most investors cannot cross. REITs give you a way to participate in real estate investing without you needing to invest a massive amount upfront. Through REITs, you earn a share of income generated through commercial real estate ownership without actually having to manage any properties yourself.
As an investment vehicle, REITs are like stocks and can be traded publicly at any time on the stock exchange. This ability of REITs turns an illiquid asset like real estate into a highly liquid one and makes REIT investing attractive to investors.
Real estate investment trusts are companies that pool money from a large number of investors and invest it in properties, generally commercial properties such as malls, apartment buildings, hospitals, and complexes.
But in order to qualify as a reit what is the standard these companies have to meet? Well, first, the trust must be formed under the Indian Trust Act of 1882> It should mainly be engaged in real estate activities, follow the regulations set by SEBI, distribute at least 90% of its taxable income as dividends to shareholders, be listed on the stock exchange, have at least 80% of its total assets invested in real estate and generate at least 75% of its income from rents and mortgages of real estate.
Types of REITs
REITs can be classified into various types depending on their real estate holdings and how they are traded:
1. Equity REITs
These are the most common types of REITs as they mainly invest in real estate that generates a steady income. These REITs own properties such as office buildings, which they lease out to collect rent. Equity REITs tend to be more stable as they earn a steady income. They distribute this income to the shareholders as dividends.
2. Mortgage REITs
While equity REITs focus on owning physical properties, mortgage REITs invest in real estate debt. Also known as mREITs, these trusts basically lend money to real estate companies and collect interest on these loans. The interest is then distributed to shareholders. Mortgage REITs carry some risk due to fluctuations in interest rates.
3. Hybrid REITs
As the name suggests, hybrid REITs are a combination of equity and mortgage REITs and invest in physical properties as well as real estate debt. This helps trusts take a diversified approach which helps reduce the risk posed by equity and mortgage REITs individually. Income is generated through interest and rent.
4. Publicly Traded REITs
This category includes REITs that are listed on the National Stock Exchange and are registered with SEBI.
5. Private REITs
These REITs are not traded publicly, and neither are they registered with SEBI. They offer less liquidity compared to publicly traded REITs and are only available to select (institutional) investors.
6. Public Non-Traded REITs
Some REITs are not listed on the stock exchange, however, one can invest in them through brokers or the REIT itself. They are registered with SEBI but offer lower liquidity than publicly traded REITs due to not being listed.
How to Invest in REITs
The Indian REIT scene is still in its infancy. SEBI introduced them not long ago, so the industry is still developing. As of 2024, investors have very limited options to invest in REITs. Here’s how you can get started:
Invest Directly
Most REITs are publicly traded, so you can buy their shares on the stock exchange. Since they trade like stocks, you’ll need a Demat account to get started. This is the most straightforward way to invest in REITs. The prices depend on investor demand and can fluctuate. As of 2024, there are only 4 companies operating in this sector – Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT, and Nexus Select Trust.
The industry is still developing and major players such as DLF are expected to join in the coming years. You can also wait for the next IPO and take advantage of getting in early before the shares rise in value as the company establishes itself in the market.
REIT Mutual Funds
The other way of reit investing is through mutual funds. Some AMCs offer funds that specialise in real estate investments. They pool money from a large number of investors to buy shares of various REITs. This gives investors the benefit of instant diversification and professional management. However, you should note that your options are limited here as well. Not all mutual funds focus heavily on REITs, and those that do might not allocate a satisfactory portion of their portfolio to REITs, which can limit your overall exposure to real estate. The best way to invest in REITs as of now is through direct investment.
When you do invest in REITs directly, remember to diversify across different sectors of real estate such as residential, commercial, healthcare, industrial, hospitality, storage, and data centres. Each sector tends to react differently to market conditions, so by diversifying you can balance the performance of your portfolio and reduce risk.
Advantages of Investing in REITs
Here are a few benefits REITs offer:
- They allow you to invest in real estate with a small initial amount.
- Real estate is considered an illiquid asset. REITs fix these issues as they can be traded on the stock exchange.
- According to SEBI guidelines, REITs have to distribute 90% of their income to investors as dividends. This makes them a good income-generating asset for individuals looking for a steady income.
- REITs are publicly traded and regulated by SEBI, so they offer transparency.
- They can be a great way to diversify one’s investment portfolio and gain exposure to real estate.
- REITs are managed by professionals who have a ton of experience in the real estate market.
While the advantages of investing in REITs are quite appealing, you should also be aware of some limitations, such as:
- REITs are subject to market risk.
- They can have high transaction costs and management fees.
- Currently, there are only 4 active REIT companies in India, so the investment options are very limited.
- Because this is a relatively newer investment vehicle, the number of investors in the market isn’t that high yet. This can lead to liquidity issues when you want to sell your shares.
- There are no tax benefits offered by REITs. The dividends you earn are added to your income and taxed as per your tax slab.
- REITs have to distribute 90% of their income to investors as dividends. This leaves only 10% that they can reinvest into the venture, which makes their growth limited.
REITs vs. Real Estate Mutual Funds
REITs should not be confused with real estate mutual funds. While a real estate mutual fund can invest in REITs, it is not limited to them. Real estate mutual funds invest in a much broader range of real estate related assets and securities, such as stocks of real estate companies, property developers, or even direct investments in real estate.
Here’s how REITs and Real estate mutual funds differ from one another:
| Factor | Real Estate Investment Trusts | Real Estate Mutual Funds |
| Structure | These are companies that own and manage real estate that can produce income, like through rent or mortgage. They also give loans to real estate companies and earn an interest income. | Real estate mutual funds pool money from a large number of investors and build a diversified portfolio of real estate related securities, such as REITs and stocks of real estate companies. |
| Tradability | REITs can be traded on the stock exchange. | Funds aren’t traded on the stock exchange. |
| Liquidity | The liquidity of a REIT depends on the number of buyers in the market. If there are enough buyers, REITs offer higher liquidity. | The units of a real estate fund can be redeemed at the net asset value of the day. They can be redeemed quickly, but maybe not as fast as REITs. |
| Demat Requirement | A demat account is required to invest directly in REITs. | No need for a demat account to invest in real estate funds. |
| Returns and Dividends | It is mandatory for REITs to distribute at least 90% of their taxable income as dividends. | Real estate mutual funds have no such requirement. The amount they can distribute as dividends depends on the fund. |
Conclusion
Real estate is often thought of as something only the wealthy can afford. Though it may have been true for a while back then, it is no longer the case. Through real estate investment trusts, investors can get exposure to real estate without the huge investment upfront or the headache of directly managing a property. REITs are a fairly new investment vehicle in India, so the options are limited for investors. However, there is a lot of room for growth in the future. You can invest in REITs directly or through REIT mutual funds.
Before you invest, assess your financial goals, risk tolerance, and investment strategy. REITs are good for gaining exposure to real estate with small investments and earning a steady dividend income. There are many benefits and limitations of investing in REITs, which should be carefully considered before making a final decision. Understand the tax implications of investing in REITs, and if you ever find yourself overwhelmed, know that a financial advisor can help!
