REITs as an alternative to traditional real estate? ‘A big yes’

Real estate – just like gold – is among the most preferred investment avenues for Indians. The higher ticket size, however, doesn’t make it accessible to many. Buying property for self-occupation in itself is a big achievement let alone having it for investment purposes. What if you could get some bit-sized exposure in real estate?

Real Estate Investment Trusts (REITs) gives you an easy and affordable entry into the real estate segment. The minimum investment amount is Rs 50,000 at the IPO stage. Once listed, roughly Rs 2 lakh investment in one go will serve the purpose.

“When a REIT IPO comes out, the minimum investment size for retail investors is Rs 50,000. After it is listed, you have to buy the REIT stock in a lot size. So, if you were to buy 270 units, theoretically it will amount to Rs 2 lakh,” says Kirtan Shah, co-founder & CEO, SRE Wealth.

Interestingly, market regulator, Sebi has amended the REIT regulations to bring down the minimum application value at the IPO stage to Rs 10,000-15,000 and the trading lot to one unit. The circular came out in June 2021.

No new REIT IPO has been launched since then. Currently, Embassy REIT, MindSpace REIT, and Brookfield India REIT are the three REIT stocks listed on stock exchanges. Kotak Mahindra AMC has an International REIT Fund of Fund, in which the minimum investment amount is Rs 5,000.

REITs not only give you better liquidity but are more tax efficient. Shah explains that investors earn three types of income in REITs – i) dividend income, ii) interest income and iii) capital gains.

“Dividends are tax-free. REITs can lend money to another developer and receive interest. This income is taxed at the slab rate, but comes out to be very less. Capital Gains on the stock exchange are taxed at the same rate as a normal share, however, the threshold for long-term is three years,” says Shah.

Short Term Capital Gains Tax of 15% is levied if you sell the REIT before three years, while Long Term Capital Gains are taxed at 10% if you sell the REIT units after three years.

Regular income via REITs

REITs are mandated to distribute at least 90% of rental income as dividends to the unitholders. This gives retail investors an opportunity to generate a stable rental income. “The rents for tenants go up every three-five-years. The rent income that REITs receive from tenants has been very regular and going up linearly. While India is a basic market still, global data from mature markets show rental income has been quite stable. I don’t see any reason why REITs cannot be a replacement for traditional real estate,” says Shah.

However, investors looking for regular income from REITs should not take the MF route as mutual funds don’t have a compulsion of distributing 90% rent to investors. “The fund will receive rent from the various REITs it has invested in but may not distribute it to the investors. It may instead accumulate it to increase the NAV,” says Shah.