REIT - Types, Advantages, Limitations About Real Estate Investment Trust (2024)

The REIT full form is Real Estate Investment Trust refers to an organization made with the sole reason for directing investable assets into working, claiming, or financing, an income-creating property. REITs in India are displayed on the lines of mutual funds and give investors a very fluid approach to get stakes in real estate. It is a sort of security that gives a wide range of financial backers a source for ordinary pay, portfolio expansion, and long-term capital appreciation. Like other securities, REITs can enroll themselves in a stock trade.

Did you know REITs were originally conceptualized in America around 1960 under the Cigar Excise Tax Extension Act? In India, however, the Real Estate Investment Trusts India was introduced by the Securities and Exchange Board of India in 2007. At that time, they only released a draft but it was rejected because of certain limitations. Later on, in 2013, the securities and exchange board of India released revised regulations which were approved on the 26th of April 2014.
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REITs are beneficial for a lot of investors. One benefit is that it provides regular income with reduced portfolio volatility, dividends, and wealth accumulation. Since it is a listed entity, it can be sold and bought very easily, which provides great liquidity. It is quite the hedge against inflation which is another benefit. And what’s noticeable is that it consistently outpaces Customer Price Inflation.

What is a Real Estate Investment Trust (REIT)?

If you are wondering what is REIT investing, it is a type of collective investment scheme that allows investors to purchase shares in a portfolio of income-producing real estate assets. In case you want to know REITs full form, the full form of REIT stands for Real Estate Investment Trust. Basically,Real Estate Investment Trust or reits meaning is referred to as a company that operates or owns or finances any income-generating real estate. A good example of this would be co-working workplaces in the ‘gig economy’ era, where similar to mutual funds, REITs end up pooling the capital of several investors. Instead of direct investments to real estate such as buying a commercial property, this shares the investments as well as the dividends without the need to manage it themselves. Essentially, REIT allows for investors with significant exposure to real estate assets.

How do REIT work?

Depending on the classification of REITs, investors can choose from a diverse list of real-estate funds including Equity REITs and Mortgage REITs. Properties such as hotels, shopping, offices, condos, offices, etc. fall under equity REITs while mortgage REITs draw their income from Mortgage Backed Securities or even the interest earned on the investments. Essentially, REITs help offer easy and quick liquidation of your investments in the real estate industry, and depend on the infrastructural development, structured governance, and encouraged investments both domestically and from abroad.
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How to Invest in REIT?

It is best to see REITs as true ‘total return’ investments given they offer significantly higher dividend yields as well as an appreciation of the long-term capital. It is best to look for companies that do a good job historically at both of the above. Also, given that REITs are not like traditional real estate, you can trade them on stock exchanges, and therefore offers a wide diversification of the portfolio. Be sure to check the payout ratio to measure the potential of a REIT meaning you should gauge the yield for the long term. Finally, as it goes with every other investment, ensure that the REIT you choose has strong management overseeing the performance of the funds.

How does a Company Qualify as a REIT?

The most basic thing about a REIT is the business model. Space is leased, and rent is collected on profits, and then the income is distributed among shareholders. But, how does one qualify for a REIT? And how to invest in REITs in India? Let’s explore the eligibility criteria for REIT companies in India.
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1. From the income you get from the REIT, 90% must be shared with the investors in the form of dividends.
2. 80% of the investment must be made in properties that have the potential to garner income and revenue.
3. Only 10% of the aggregate investment should be made in real estate under-construction properties.
4. The company in question needs to have an asset base of at least 500 crores.
5. The NAVs must be updated twice every financial year.

Now that you understand the boxes you need to check them off. Let’s dive into why you need it.

1. They come with a diverse profile that lets the investor make investments in REIT funds in India.
2. It provides quick liquidation of investments in the real estate market.
3. The growth and improvement of a country depending on the development of infrastructure and naturally has a domino effect on the economy’s growth.
4. They make sure of the concrete structure of the real estate financing industry so that eventually it leads to overall growth and improvement.

Advantages of Investing in REIT

1. REITs are not as intensive as direct investment into property.
2. Investing in Real Estate using REITs is much easier.
3. Naturally, the REITs have a lower liquidity risk in comparison with direct property investments.
4. There are very low chances of foul play since the REITs are regulated with the SEBI.
5. Since they reveal the capital portfolio annually and semi-annually, they are transparent.
6. They offer a higher dividend because from the income 90% must be best-listed.

Now that we know the many benefits that come along with REITs let’s see which type works the best for you.
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Types of REIT In India

Equity REITs

With equity REITs, they are sole owners of the property and can lease it out to various companies or people. The revenue garnered from this will then be shared among the investors in the form of dividends.

Mortgage REITs

They do not belong to the owner; however, they do get EMIs against the property from owners and builders. The earnings are via net interest margin which is shared among the REIT investors in the form of dividends.

Hybrid REITs

As the name suggests, Hybrid REITs are an investment in both Equity and Mortgage REITs.

Private vs Public REIT

REITs are traded both publicly and privately, i.e. one type is registered with the SEBI and another is not. But which one should you choose?

Private REITs

Private REITs are trusts which work as privateplacements, that serve only a select number of investors. It’s important to note that Is are not traded on national security exchanges and these are not registered with the SEBI.

Publicly Traded REITs

So, what is a public REIT? Publicly Traded REITs offer shares that are on the national securities exchange. These are also regulated by the SEBI. In addition to this, individual investors can sell and buy these shares via the NSE.

Public Non-Traded REITs

Public Non-Traded REITs Are not listed but they are still registered with the SEBI. It is important to note that these are not traded on the National Stock Exchange. These options are less liquid. One benefit is that it is more stable and not as subject to market fluctuations.

Pros and Cons of Investing in REITs

• REITs are not as intensive as direct investment into property.

• Investing in Real Estate using REITs is much easier.

• Naturally, the REITs have a lower liquidity risk in comparison with direct property investments.

• There are very low chances of foul play since the REITs are regulated with the SEBI.

• Since they reveal the capital portfolio annually and semi-annually, they are transparent.

• They offer a higher dividend because from the income 90% must be best-listed.

Limitations on REIT

Dividend Taxation

Since REITs have above-average dividends, they aren’t taxed at the corporate level. The disadvantage is that the dividends don’t meet the Indian Revenue system’s exact meaning of qualified dividends, which are taxed at lower rates than normal income.

REITs qualify for the new 20% pass-through deduction. This deduction was created as part of the Tax Cuts and Jobs Act. However, the REIT dividends are anyway taxed higher than qualified dividends. It is important to take note of this if you own your REITs in a standard brokerage account.

Interest Rate Sensitivity

Another downfall is that REITs are extremely sensitive to interest rate fluctuations, and rising interests are bad for REIT stock prices. When the yields investors can get from risk-free investments like Treasury securities increase, yields from other income-based investments rise accordingly.

Long Term Investments

Since REITs function best as long-term investments. Apart from interest rate fluctuation, multiple factors have an effect on REIT prices over a short period. It is advisable to not put any money that you are going to bring in the next couple of years towards REITs because when it comes to REITs, a longer duration of time is better.

Property Specific Risks

While REITS adds a lot of diversifications to your portfolio, you must remember that most singular REITs are not very diverse as they tend to focus on one specific property type, in addition to this each property type has its own set of risks and drawbacks.

Who Should Invest in REITs?

REITs are one of the most expensive investments out there. They own and maintain high-value real estate properties, Therefore, the investors who put their funds in these are those who have more than a good enough amount of capital at their disposal. Some examples of the people that invest in these are massive institutions like insurance companies, Bank trust departments, Pension Fund departments, etc.

How to Invest in Real Estate Investment Trusts?

There are three ways to go about investing in REIT shares in India the following are three ways:

Stocks

Investing through stocks is the most direct way to invest in real estate investment trusts.

Mutual Funds

If you choose to invest in a real estate investment trust in India using mutual funds, you have the ability to diversify your investment portfolio significantly. It is an indirect method of investment; the investors need to go through a mutual fund company.

Exchange-Traded Funds

Using this method of investment, investors would have indirect ownership of the property and will benefit from its diversification.

Tips to Assess Real Estate Investment Trusts

Real estate investment trust india as such a huge investment it is important to remember the following tips and tricks to effectively go about your investments

1. Before going ahead or making a decision about your Real Estate investment trust, do a little research on corporations that have a positive record when it comes to offering high dividend yields. Also, make sure to analyse the role the company plays in facilitating capital appreciation over a long period.
2. If you want to diversify your investment portfolio, without staying invested for a long period, you can do so by purchasing shares through Stock Exchanges.
3. Make sure to invest in real estate investment trusts that have the potential of holding diverse properties and tenants.
4. It is advisable to opt for EFTs and mutual fund options while investing in REITs, because these funds come with professional experience and investors, in this way, will be able to manage and do the job proficiently.
5. It is also advisable to go ahead with companies that have been active in the field for a long time and have an experienced team to work with.

Lastly, individuals should make a point to find out how their investments would be compensated. For instance, they should scrutinize the management team of REIT and their performance record with the help of metrics like funds from operations or financial management rates. Similarly, it would prove beneficial to factor in a REIT’s growth in EPS and current dividend income before investing to maximize returns. Thus, we would say that you need to do your research well in advance before you do anything else.

Performance of REITs in India – What’s the Score so far?

The performance of REITs in India has been a matter of interest for many. In recent years, REITs have been making waves in the Indian Real Estate market, with many calling it the future of property investment.

According to a recent report by CRISIL, the Indian REIT market has grown significantly in the past few years, with the total assets under management (AUM) increasing from ₹40,000 crore in 2018 to ₹54,000 crore in 2020 source. This growth can be attributed to the increasing popularity of REITs among investors, who are looking for stable and secure investment options in the current economic climate.

Here are a few more interesting statistics on the performance of REITs in India:

• In 2020, the total returns of REITs in India was 10.8%, compared to the benchmark index Nifty REIT, which returned 9.3% source
• In the same year, the Indian REIT market witnessed its first-ever initial public offering (IPO) with the launch of Mindspace Business Parks REIT, which was subscribed 2.5 times source

Taxation on REITs in India – Are you ready to pay up?

Now that we’ve covered the performance of REITs in India, let’s take a look at the taxation aspect. Investing in REITs can be a great way to get exposure to the Indian Real Estate market, but it’s important to understand the taxation implications.

In India, REITs are taxed as per the Income Tax Act, 1961. The taxation of REITs in India depends on several factors, such as the type of REIT, the type of investor, and the type of income generated by the REIT source.

Investing in REITs: The Ins and Outs!

Real Estate Investment Trusts, also known as REITs, are a type of investment vehicle that allows individuals to invest in real estate properties without the hassle of physically owning them. REITs are full of opportunities, but they also come with some challenges. In this section, we’ll explore how to invest in REITs in India, the advantages and disadvantages of REIT investment, and the types of REITs available in India.

REIT Advantages and Disadvantages

Advantages of investing in REIT real estate

• REITs provide access to real estate investment opportunities that may be difficult to access otherwise.
• REITs allow investors to diversify their investment portfolios, reducing the risk associated with single stock investing.
• REITs offer regular income in the form of dividends, making them a reliable source of passive income for investors.
• REITs are required by law to distribute at least 90% of their taxable income to shareholders, which makes them a tax-efficient investment option.
• REITs are regulated by the Securities and Exchange Board of India (SEBI), providing investors with an added layer of security.

Disadvantages of REIT Investment

• REITs are subject to market fluctuations, making their value subject to change.
• REITs are subject to management risk, which is the risk associated with the performance of the management team.
• REITs are subject to interest rate risk, which is the risk associated with changes in interest rates.
• REITs may be subject to liquidity risk, making it difficult for investors to sell their REIT investments quickly.

How to Invest in REITs?

Investing in REITs is a straightforward process, but there are some key steps that you should follow to ensure a smooth experience:

1. Choose a reputable brokerage firm that offers REIT investment options.
2. Open a brokerage account with the firm of your choice.
3. Research and compare REITs to determine which one aligns with your investment goals and risk tolerance.
4. Place an order to purchase shares of the REIT of your choice.
5. Monitor your investment and make any necessary changes to your portfolio to ensure it remains aligned with your goals.

Investing in REITs with NoBroker: Get expert guidance and support every step of the way

Investing in REITs can be an exciting and rewarding experience, but it is important to remember that it is not without risk. It is always a good idea to consult with a financial advisor before making any investment decisions. If you’re looking to get started with REIT investment, NoBroker can help you navigate the process and provide guidance and support every step of the way.

With NoBroker, you can access a wide range of real estate investment options, including REITs, and take advantage of our expert knowledge and experience to make informed investment decisions. Get in touch with us today to learn more!

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