A real estate investment trust, or REIT, is a company that owns, operates or finances income-producing real estate. REITs are a process to generate funds from investors to directly put their money in profitable properties like offices, residential units, hotels, shopping centres and warehouses.
The real estate sector in India has been lucrative for savvy investors over the last decade, but it has not been without accompanying uncertainties. The introduction of REITs (Real Estate Investment Trusts) will open up a platform that will allow all kinds of investors — even those with smaller budgets — to make safe and rewarding investments into the Indian real estate market. The best thing about an REIT is that investors can start with as small a sum as ₹2 lakh to secure units in exchange.
According to a recent report by Cushman & Wakefield, commercial properties in India that are ‘REITable’ are between $43 billion and $54 billion across the top cities in the country.
How do they work?
The REIT platform has already been approved by the Securities and Exchange Board of India (SEBI) and like mutual funds, it will pool the money from all investors across the country. The money collected from the REIT funds will subsequently be invested in commercial properties to generate income.
A REIT will need to be registered via an IPO or initial public offering. REIT units, as such, will have to get listed with exchanges and consequently traded as securities. The SEBI board has kept the minimum asset sizes to be invested in at ₹500 crore. However, the minimum issue size would have to be less than ₹250 crore. As with stocks, the investors here would be able to buy the units from either primary and/or the secondary markets.
All trusts with REITs will be listed with stock exchanges as they would be structured like trusts. Consequently, REIT assets will be held with independent trustees for unit holders / investors.
Different REIT Categories
REITs typically fall within three categories-
1 . Most REITs are equity REITs. Equity REITs invest in and own income-producing real estate properties and give investors the opportunity to invest in these portfolios. They must distribute at least 90% of the portfolio’s income to its shareholders in the form of dividends.
2 . Mortgage REITs invest in and own property mortgages. These REITs loan money to real estate owners and operators not only for mortgages but also for different types of real estate loans or through purchasing mortgage-backed securities. Their earnings are generated primarily by the net interest margin, the spread between the interest they earn on mortgage loans and the cost of funding these loans. This model makes them potentially sensitive to interest rate increases.
3 . Hybrid REITs invest in both properties and mortgages.
Objective of REITs
A REIT’s objective is to provide the investors with dividends that are generated from the capital gains accruing from the sale of the commercial assets. The trust distributes 90% of the income among its investors via dividends. Apart from minimum entry level, a REIT is supposed to provide diversified and safe investment opportunities with reduced risks, and under a professional management to ensure the maximum return on investments.
Advantages of REIT
The advantages include:
1 . Income dividends: 90% of distributable cash at least twice in a year.
2 . Transparency: REIT will showcase the full valuation on a yearly basis and will also update it on a half-yearly basis
3 . Diversification: According to the guidelines, REITs will have to invest in a minimum of two projects with 60% asset value in a single project
4 . Lower risk: At least 80% of the assets will have to be invested into revenue-generating and completed projects.
REITs vs. property
Investing in an REIT can be compared to investing in gold bonds. Indians are partial to buying physical gold rather than in bonds, implying that having one’s own investment in property will always provide satisfaction than mere paper investments.Moreover the Indian property market is now almost stabilised and it is the right time to buy self-owned homes.
At the end of the day, REITs are investment instruments and not a means to acquire actual property — which is always high on every Indian’s wishlist.