Stock up on property, little by little

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Sanjay was looking at property ad in newspaper and tells his friend Vijay that property has become so expensive. A plot is costing Rs 50 lakh, how can people like him invest in it.

Vijay told him that no doubt property is becoming expensive but from investment point of view he should not feel disheartened.

Is there some way out, asked Sanjay. Vijay told that he can invest in real estate investment trust or REIT starting at just Rs 100. Sanjay was surprised. How can you invest with such a small amount, he asked Vijay.

In real estate, people usually invest by purchasing plots, flats, or commercial properties. However, due to the increasing cost of properties, common individuals often find it challenging to invest in them. For the common populace, there are two ways to ride the wave of growth in real estate – the first being Real Estate Mutual Funds and the second being Real Estate Investment Trusts, known as REITs.

First and foremost, understand what Mutual Funds or Real Estate Mutual Funds are. Mutual funds gather money from various types of investors to create a pool and then invest it in shares, bonds, or other assets. Similarly, Real Estate Mutual Funds invest money in real estate company shares, bonds, or other assets like REITs. In mutual funds, one can invest through Systematic Investment Plans (SIP) with as little as 100 or 500 rupees.

What are REITs?

Real Estate Investment Trusts (REITs) also gather small amounts from investors, much like mutual funds. However, they invest in commercial buildings, malls, or hotels. By purchasing their units, you can benefit from investing in commercial properties with a relatively small investment. According to SEBI regulations, during an initial public offering (IPO), you can invest as little as 10,000 to 15,000 rupees in a REIT. But later on, you can buy the units or shares of a REIT at market prices, which could be around 300-400 rupees.

According to regulations, REITs are required to distribute 90% of their earnings as dividends to investors. This allows you to have a sense of assured earnings. Moreover, they should possess assets generating 80% of their income through rent.

Now let’s understand the differences between Mutual Funds and REITs. The primary difference between these two lies in the types of assets they invest in. They invest in different types of assets. For instance, REITs exclusively invest in commercial properties, while Mutual Funds invest in various types of assets. In other words, Mutual Funds are more diversified. Over the long term, the risks in Mutual Funds tend to decrease, whereas in REITs, there is no such guarantee.

Investing in REITs can be done only through demat accounts via stock exchanges. On the other hand, investing in Mutual Funds can be done through both offline and online methods. Mutual Funds benefit from compounding, resulting in higher returns over a longer period. However, this advantage is not as prominent in REITs. Like Mutual Funds, REITs are also regulated by SEBI, ensuring greater transparency and strict disclosure requirements.

How’s the performance?

If we look at the returns over the past five years, both Real Estate Mutual Funds and REITs have not shown remarkable performance. In many cases, there have been negative returns. This might be attributed to the downturn of the real estate sector during the COVID-19 period. Therefore, if you intend to benefit from investing in a real estate fund or REIT, it’s important to note that you would need to invest for a considerable period of time.

Currently, in India, both Real Estate Mutual Funds and REITs are relatively scarce. Some funds even invest in international properties.

In conclusion, it can be said that both Real Estate Mutual Funds and REITs have their place in diversifying exposure to real estate. Just as professional management has come into play in equity investments through mutual funds, similarly, REITs also bring professional management to the real estate sector. However, the benefits from both of these options are realized over an extended period of time. There is a significant amount of risk involved due to the volatility in these investments. Therefore, only invest if you are willing to take such risks and can commit to a long-term investment horizon.