How to Invest in REITs in India?

When an individual builds an investment portfolio, every advisor worth their salt will suggest putting the money in various assets to spread the risk and ensure higher returns.

One such popular investment in India is real estate due to its hedge against inflation and significant capital appreciation. But it also has its own challenges – no geographical diversification, considerable investment outflow, and limited liquidity.

These real estate investment challenges can be overcome by investing in Real Estate Investment Trusts in India (REITs).

What are REITs in India?

The Real Estate Investment Trusts in India manage and/or own immovable assets – either the properties or their mortgages –for a steady source of income as leases and rents, along with capital appreciation.

Like units in mutual funds, REIT investors can purchase units and invest in a portfolio of diverse, income-producing properties. The REITs pool the investors’ money in the owned/managed real estate properties and distribute the income among the investors proportional to the units owned.

REITs can be traded on the exchange as per the REIT share price once they are listed. REIT investing allows higher diversification, ensures lower risk, and has the potential for better returns. As part of an investment portfolio, the capital appreciation and dividend income from REIT real estate create a perfect balance against stock market volatility.

REITs are listed and traded on the stock exchange. Therefore, a Demat account is needed for REIT investing.

REITs investment in India can be made through:

Direct stocks:

Investing through the stocks of the listed REITs is a direct way of investing in them.

Exchange-Traded Funds or ETFs:

To benefit from the indirect ownership of the properties and the diversification, invest in REITs as ETFs.

Mutual funds:

To diversify your investments, invest in a REIT through mutual funds via a mutual fund company.

Factors To Consider While Investing in REITs

Property Location

Location is the most crucial element in real estate investing profitability. Residential property assessments heavily consider the status of the community, green space, scenic vistas, and proximity to amenities. For valuing commercial real estate, accessibility to markets, warehouses, transportation hubs, motorways, and tax-exempt regions is crucial.

Valuation of the Property

Real estate valuation is essential for financing the purchase as well as listing price, investment research, insurance, and taxation, all of which rely on it.

Investment Purpose

Lack of clarity regarding the aim may result in unanticipated outcomes, including financial distress, especially if the investment is mortgaged, given the low liquidity and high value of the real estate.

Expected Cash Flows and Profit Opportunities

Cash flow is the amount of money that remains after expenses. A strong rate of return on an investment property depends on having a positive cash flow.

Be Careful with Leverage

Loans are convenient, but they may come at a big cost. In exchange for today’s utility at a cost of interest spread over many years, you pledge your future earnings. Be sure you understand how to handle loans of this nature and avoid high levels of debt or what they call over-leverage. In times of challenging market conditions, even real estate specialists face challenges from excessive leverage, and the lack of liquidity combined with significant debt commitments can cause real estate ventures to fail.

Conclusion

With more and more investors looking to diversify their investments in real estate, REITs serve as the perfect avenue for a diversified and secure investment. However, just like any investment, REITs also require detailed research and due diligence before investing.

FAQs

What are the listed REITs in India?

As of 31st March 2021, India has 4 registered REITs. Of these, only 3 are listed, which are:

Mindspace Business Park REITs
Brookfield India Real Estate Trust
Embassy Office Parks REITs

What are the benefits of REIT investment in India?

Cheaper alternative to property transactions
Easy entry and exit from real estate investments
Automatic price determination system
Property and geographical diversification
Less risky than a direct investment in real estate
Higher liquidity than direct property investments

What are some things to check before you invest in REITs?

Asset portfolio of the REIT or the Special Purpose Vehicle (SPV)
Past performance of the stocks
Historical profits of the REIT
Occupancy Ratio of the properties
Sectoral diversification of the properties and tenant quality
Weighted Average Lease Expiry
Geographical diversification of properties
Yield from dividends.

How to buy REITs in India?

On stock exchanges, REITs are listed and traded, and investors can purchase units through a Demat account. To take advantage of new REIT launches, investors can also look at IPOs.

What is the minimum investment in REIT India?

The minimum amount to invest in REIT India after SEBI’s notification on July 30th, 2021, ranges from INR 10,000 to INR 15,000. In the same SEBI regulation, the minimum lot size for REITs was also decreased from 100 units to 1 unit.

Disclaimer: This article is based on the information publicly available for general use. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.

See Also

REITS and Inflation Protection

As someone deeply immersed in the realm of financial investments and real estate, I bring forth a wealth of knowledge and experience in navigating the complexities of portfolio building and investment strategies. Having actively engaged in the financial markets and closely monitored the evolution of investment instruments, I am well-versed in the nuances of real estate as an asset class and, more specifically, the transformative role played by Real Estate Investment Trusts (REITs).

Understanding REITs in India:

Real Estate Investment Trusts (REITs) in India represent a significant paradigm shift in the way investors approach real estate. These investment vehicles manage and/or own immovable assets, generating a steady income through leases and rents, coupled with the potential for capital appreciation. Drawing parallels with mutual funds, REITs enable investors to purchase units, providing access to a diversified portfolio of income-producing properties. The pooling of investor funds allows for proportional distribution of income among unit holders.

The unique feature of REITs is their tradability on stock exchanges, offering a level of liquidity that traditional real estate investments often lack. This not only addresses the challenge of limited liquidity but also enhances the overall diversification of an investment portfolio.

Investing in REITs in India:

To partake in the REIT market in India, investors can opt for different routes, each catering to varying preferences and risk appetites:

Direct stocks: Investing directly in listed REITs through the stock market.
Exchange-Traded Funds (ETFs): Indirect ownership through REITs as ETFs, providing diversification benefits.
Mutual funds: Investing in REITs via mutual funds, allowing for broader diversification through a mutual fund company.

With a regulatory push from the Securities and Exchange Board of India (SEBI), investing in REITs has become more accessible, with reduced minimum investment requirements and lot sizes, making it an attractive option for a broader investor base.

Factors to Consider When Investing in REITs:

Successful REIT investing requires careful consideration of several factors:

Property Location: The profitability of real estate investments hinges on the location, whether residential or commercial, and factors such as community status, accessibility, and proximity to amenities.
Valuation of the Property: Accurate real estate valuation is crucial for financing, investment research, insurance, and taxation purposes.
Investment Purpose: Clearly defining the purpose of the investment is essential to avoid unexpected outcomes, especially when dealing with mortgaged properties.
Expected Cash Flows: Positive cash flow is crucial for a strong rate of return, emphasizing the importance of assessing income potential.
Leverage: While loans can be useful, understanding and managing leverage is crucial to avoid over-leverage and potential challenges in market downturns.

Conclusion and FAQs:

In conclusion, REITs offer a compelling avenue for investors seeking diversification and security in their real estate investments. However, due diligence and thorough research remain paramount.

The FAQs provide additional insights, covering aspects such as listed REITs in India, benefits of REIT investments, and key considerations before investing. These details offer a comprehensive guide for potential investors looking to navigate the REIT landscape.

In adherence to transparency, it's essential to note that the information provided in this article is based on publicly available data for general informational purposes. Readers are encouraged to seek independent advice for specific investment decisions, as market conditions can vary, and individual circ*mstances may differ.