Conventional wisdom says that it’s always good to invest in property. But the way the real estate market has been going, not many of us are completely convinced at the moment. Buying a property and making sure it generates income is a herculean task in these times. However, there is a way to invest in realty that guarantees regular returns without you having to go through the hassle of managing it. And that is called as REITs or -Real Estate Investment Trusts. What are they and should you go for it? These are the 9 things you need to know before you make a decision.
REITs are basically like Mutual Funds, where investors pool in money to buy a portfolio of assets. While in the case of MFs, the asset that’s being bought is Equity, Debt or Gold, while in REITs the asset being bought is property. But in both cases, the assets are professionally managed by a designated Manager to ensure regular income generation and capital appreciation.
REITs as a concept originated in the US way back in the 1960s. In India, it is relatively a new concept, as the first guidelines were introduced by SEBI in 2007. And the first Indian REIT eventually hit the market just a couple of years ago.
Just LIKE Mutual Fund REITs in India have a 3-tiered structure.
Sponsor – Responsible for promoting the REIT with Capital. This is usually a Real Estate company that owned the assets prior to the creation of the REIT. The REIT Sponsor is mandatorily required to hold 25% of units for the first 3 years after the creation of a REIT. After 3 years, it can be reduced to 15% of total outstanding REIT units.
Manager – Responsible for selecting and operating the properties, and ensuring timely reporting as well as disclosure by the REIT.
A REIT Manager is typically a company that specializes in Facilities Management.
Trustee – Those chosen to be a REIT Trustee are typically companies that specialize in providing Trusteeship services. For example, Axis Trustee Services Limited operates as the trustee for both Embassy Parks REIT and Brookfield REIT. The Trustee is responsible for holding the assets of the REIT in a Trusteeship for the benefit of unitholders.
Additionally, they are required to oversee the activity of the manager and ensure the timely distribution of dividends.
In other parts of the world REITs invest in any kind of income generating properties – residences, office spaces, hotels, malls etc. But in India, REITs that are listed focus mainly on office properties. And SEBI guidelines mandate that 80% of a REIT’s portfolio should be invested in completed and rent generating properties
Currently there are exactly 3 REITs available for investment in India – Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust. More such REITs are likely to hit the market soon with big names like DLF and Godrej having expressed interest in introducing their own.
SEBI recently brought down the minimum investment amount in REITs from Rs 50,000 to Rs10,000 and now to Rs 15,000, with trading lot size reduced to only 1 unit from 200 units. That means, you can start investing in real estate with a much smaller sum of money and your investment is not restricted to one particular property in one location, but rather a diversified real estate portfolio that covers different locations.
Unlike plain property investments REITs come with a mandate to generate regular income. They have to distribute 90% of their income to unit holders in the form of dividend or interest income or both. So far over the last 2 years, Indian REITs have been distributing dividend and interest to investors every quarter.
In India it is compulsory for REITs to be listed on the stock exchanges. As they are being traded, the price of individual units changes depending upon their performance as well as market demand. Just like Stocks and Mutual Funds, good performance by a REIT results in an increase in the price of REIT units, that can be sold at a profit and provide Capital Gains to the investor.
While REITs come with many intrinsic advantages, there are many risks attached to them as well. For instance, REITS in India mostly invest in office properties. And with Work From Home increasingly becoming the order of the day in these times, the demand for office space has taken a massive hit. Taxation on REITs too is rather complicated when compared to other fixed income investments. And returns from REITs have so far been similar to the yields on safe bonds and post-office schemes.
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