What is a Real Estate Investment Trust (REIT)?

For the Indian market, real estate has always been an attractive investment class. Thanks to the decent capital returns that have made real estate investment quite attractive. Over time the concept of real estate investment has evolved. Today, even if you do not have a large corpus, you can invest in this sector in the form of REIT. Now, the question is what is REIT investing, how does it work and is it profitable?

Read on to explore what is REIT investing.

What is a Real Estate Investment Trust

A Real Estate Investment Trust or REIT is a company or association that holds a portfolio of high-priced real estate units that are leased out for rental yields. The profits earned thereon are further segregated among the shareholders as dividends. REITs are listed in the stock market and operate in the same manner to help investors foray into real estate without having to purchase or manage properties by themselves. With REIT one can purchase the shared ownership of the property and later on sell it off and earn the equity. REITs offer better liquidity than the physical real estate investment.

REITs make a great option for small investors to appreciate their capital gains and generate income. This is, no doubt the most realistic way to increase your capital gains from real estate investment.

Whether you are a beginner, a small investor, or a bigshot., REITs are open to all. You will realize the benefits according to the stakes involved. Properties available as REIT units mostly comprise data centers, infrastructure, healthcare units, apartment complexes, etc.

Key Highlights Of REITs

REIT as a corporation, finances, manages, and operates income-producing properties.REITs serve as a steady income source in the form of revenue but do not get enough capital appreciation, REITs are publicly treated stocks and their liquidity value is higher than traditional real estate investment.

However, investing in the REITs is not as easy as it sounds. Though it does not need a huge corpus, it’s important to know the investment strategy and follow it. How to invest in REITs is a crucial discussion in this context. 

What’s in the news

REITs in India offer the perfect mix of growth potential and a consistent dividend component.Commercial realty maintains a positive trajectory for the REIT investment. The growth of Global Private Equity funds, Pension funds, and Sovereign funds has helped developers gain capital and move from the ‘Build and Sell’ to the ‘Build and Lease model. Approximately INR 50-60,000 crore worth of commercial real estate are REIT-worthy assets.

How To Invest in REITs?

There are two different ways to invest in the REITs in India. 

1. REITs as stocks: Buying REITs as stocks is one of the most common forms of REIT investing. REITs operate stocks and are listed in the NSE and VSE. These are traded in the same way as company shares. For trading your REITs via a broker or online platform, it’s important to have a Demat account.
2. REITs as mutual funds: Lately, some mutual funds also invest in REITs along with other assets. It’s a good option for investors looking to diversify their investment portfolio. Also, it is a great option for investors with less capital, but who want to get exposure to REITs. However, the returns of the REIT via mutual fund depend on the performance of the particular fund instead of exclusively the REIT share. 

Here are some additional considerations regarding how to invest in REITs

• The number of REITs listed in the stock exchange is still not very big.
• REITs are the emerging asset class, which means there won’t be much data to support the previous track record of these products.
• Like other stocks in the market, REITs are subject to changes in interest rates, property prices, and vacancy rates.

Slice Vista experts recommend you to perform thorough research before investing in REITs. Reflect on your investment goals as well as risk tolerance before making any investment choices. 

Also Read: Differences Between Timeshare and Fractional Ownership in Real Estate Investment

How Do Real Estate Investment Trusts Work?

Precisely, REITs are income-generating investment assets. Its sole target is to generate income from the rental yields in commercial realty. Here are the steps that will help you figure out how do real estate investment trusts work.

Structure of REITs

• REITs are companies/trusts that are registered under the SEBI
• The entire trust is operated by the sponsor, trustee, and the investment manager. The sponsor is responsible for creating the trust and further transferring the ownership of income-generating properties to it. The trustee is a sovereign body that protects the investors’ interests and ensures the streamlined functioning of the trustee according to legal regulations. An investment manager is the team that manages the real estate portfolios for REIT. 

Investment Process

1. The sponsor creates the trust and within three years of its establishment releases an IPO (Initial Public Offering) to attract investment.
2. Funds so collected are further used for purchasing business spaces such as office buildings, malls, hospitals, warehouses, data centers, and more.
3. Then these are leased out to the tenants for generating rental income.
4. 90% of the rental income from the REIT units is shared among the investors as dividends, as per the SEBI guidelines. This serves as a regular income source on a monthly or quarterly basis.
5. REITs also offer capital appreciation, if and when the Trust sells them. It offers long-term capital gains to the investors.

Benefits of REITs for Investors

• High Liquidity: Unlike traditional real estate investment, REITs have higher liquidity. REIT units are traded in the stock market, thus it gives investors optimum flexibility to enter and exit the market as per their needs.
• Steady Income Source: Rental yields from the REIT units offer a steady income source on a monthly or quarterly basis.
• Diversification: REITs offer easy entry into the real estate market without the hassles of owning it. 
• Transparency: REITs operate under strict regulations by SEBI. Plus, regular audits by SEBI also ensure transparency in operations.

Also Read: Types of Real Estate Investment

Types of REITs in India

REITs in India are broadly classified based on the methods they are traded. Here is the list of the real estate investment trusts in India. 

Equity

Equity is the most popular version of the REIT due to its high-income-generating capability. Equity-based REIT units deal with Grade A commercial realty that offers high rental yields. 

Mortgage

Mortgage REITs or mREITs are basically offering loans to the proprietors while extending mortgage facilities. In exchange, the REITs acquire mortgaged securities. The interest of the provided loan serves as the income source of the REITs. In case the proprietor fails to repay the loan, the mortgaged property is acquired by the REITs and sold off to earn capital gains.

Hybrid

Hybrid REITs are great for diversifying investment portfolios in the real estate sector. The hybrid model allows investors to park their funds in the equity and mortgage REITs. It helps them collect both rent and interest and strengthen their portfolio. Hybrid REITs are less prone to market risks. 

Publicly traded REITs

They deal in theNational Securities Exchange just like company shares and are regulated by SEBI. Investors can purchase and sell these shares through NSE.

Private REITs

Private REITs are intended for an exclusive investor group and require a comparatively larger corpus than the other types of REITs. These are not regulated by SEBI, neither they are traded in NSE.

Public non-traded REITs

These are registered with the SEBI but not traded at the National Stock Exchange. Also, these are less liquid than the other forms of REITs. Plus, they are more stable as they are not subjected to market fluctuations.

Also Read: Commercial vs Residential Fractional Investment

Should You Invest in REITs?

Now that you know what is REIT investing, it’s time to figure out if REITs are for you. As you know REITs deal with Grade A commercial realty with high-ticket size, it’s obvious they are expensive. It means, if you do not have substantial capital at your disposal, REITs aren’t for you. Unlike individual investors, REITs are best suited for insurance companies, bank trust departments, or similar institutional investors.

Does REIT Help Strengthen Your Retirement Investment Plan?

As already mentioned REITs are not too popular among individual investors. However, many people still prefer investing in the Hyvrid REIT model to diversify their investment portfolio. Here’s how it helps investor strengthen their post-retirement investment. 

• Own a diverse mix of properties: Diversifying asset classes helps an investor stay strong during market downturns. Price fluctuations do not impact the REITs because they ae less likely to fall like stocks. 
• Steady income generation: Post-retirement when your primary income source stops, there will be a steady income from your secondary source.
• Potential for long-term profits: In spite of being traded like stocks, REITs are more aligned with the market itself. When stocks and bonds follow a 6-year business cycle, REITs tend to follow the same pattern for over a decade. No doubt for a long-term investment opportunity REITs are a great option.
• Hedge inflation: With REIT, investors can hedge the effects of inflation in the long run. Moreover, REIT is a long-term investment plan compared to others. It helps investors safeguard their funds from the effects of inflation, which is otherwise not possible in stock investment. 

Also Read: Real Estate Bonds vs Fractional Ownership

Pros and Cons of REIT Investment
High liquidity	Zero tax benefits
Portfolio diversification	Subject to market risks
High returns with high risks	High maintenance fee
Transparent & regulated by SEBI	Low Growth
Steady income as dividends	Additional charges

Final Thoughts

As an asset class, REITs have a high potential for income generation and capital appreciation. However, not everyone is the ideal candidate for REIT investment. Do your research, and weigh the pros and cons as well as your requirements to decide if a REIT investment is one for you.

Also Read: Fractional Ownership vs. Cryptocurrency