REITs allow you to own a tiny slice of prime commercial real estate

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REITs are in the news again. Real Estate Investment Trusts are a relatively new investment option through which the common man can make micro-investments in premium commercial real estate around India. Imagine owning a piece of a tech park in Bangalore for a few thousand rupees. At any another time, this would seem like an attractive option. But with a raging pandemic which has led to the emergence of a work-from-home economy, there’s a question mark over the relevance of office spaces, malls, and other commercial projects. Let’s take a quick look at what’s going on with REITs today.

What Are REITs?

Think of mutual funds but for real estate companies. Mutual funds allow you to spend as little as Rs. 500 a month to own units in a diversified portfolio of shares and bonds, which could otherwise cost lakhs of rupees. The mutual fund investor gains when the market value of the units appreciate. The investor can also earn dividends from this investment. In a somewhat similar fashion, a REIT allows you to make micro-investments of a few thousand or lakh rupees in real estate companies which would otherwise cost hundreds of crores. The investments provide rental income apart from capital appreciation. If you’re a REIT unit holder, you’re like a shareholder in a real estate trust and you’re entitled to the income generated by the properties owned by the trust.

How can investors benefit from REITs?

Ordinarily, if you wanted to own commercial property in a large city, you would need to spend hundreds of crores of rupees. That comes after tonnes of paperwork, due diligence, and other challenges involved with large real estate transactions. But with a REIT, you could buy units in the tech park for—let’s say—as little as Rs 50,000. The investment would appreciate if there’s great demand for the projects you’re invested in, and you would also be entitled to a proportionate share of the rental income they generate. While you’re entitled to the income, you’re spared the troubles of the paperwork, the large investments, and the great challenge of maintaining the properties, all of which would be handled by the trust that own the properties. Just like stocks, REITs are listed on stock exchanges, which makes it possible for investors to buy and sell them as required for their investment needs. Therefore, they’re easier to liquidate than a traditional real estate investment which tends to be illiquid.

Is investing in real estate a good idea?

In light of the pandemic, commercial real estate projects have come under a cloud. The question is when we can go back to a work culture where offices can replace remote working. There’s no clear answer to this at the moment. It would please REIT investors though that REITs have managed to hold on to a large part of their rental contracts despite harsh lockdowns and adverse economic conditions. It is expected that we’ll return to a form of a conventional work culture at some point in the future. Therefore, what REIT investors need to assess in this fluid situation is whether their investments would be able to generate the necessary rental income or capital appreciation necessary for their investment goals. After all, any investment should be done for a clear goal such as capital gains, regular income, and the fulfilment of a life aspiration such as retirement. Another way to look at the situation is that REITs are underpriced while uncertainty persists over the future of commercial properties. But once pandemic-related fears dissipate, REITs could see better capital appreciation.

How can you invest in REITs?

Securities regulator SEBI has recently made announcements changes to REIT investment norms. These would now allow investors to buy REITs in smaller quantities. Often in any IPO, the company seeking funds requires investors to buy a minimum number of shares. If the number is large, it may deter smaller investors. If the number is small, more retail investors can participate. SEBI has announced that the minimum investment for REIT IPOs should be reduced to Rs. 10,000 to 15,000 and the minimum trading lot to one unit. This would attract small investors looking to own a spoonful of prime, commercial real estate. REITs can be bought during the IPOs via trading platforms. They can also be bought from stock exchanges on which they’ll be listed.

Should you invest?

With any investment, you should have a clear line of sight into the following: returns, liquidity, and risks. Secondly, on these three parameters, you need to compare REITs to other forms of investment. For example, if a REIT returns 10% a year through a combination of rental yield and capital appreciation, it compares favourably to a debt investment option such as provident fund or fixed deposit. However, can it also regularly hit 12-15% like the best mutual funds can? These are questions you’ll need to have answers to.

There’s also the need to diversify your investment portfolio, and a portion of your portfolio linked to REITs could bring you above-average long-term returns and regular liquidity through rental yield. As always, you must enter any investment based on your goals, returns expectations, liquidity needs, and risk appetite.