A real estate investment trust (REIT) is an investment trust that owns, operates, and finances real estate with the main aim of generating income. It manages a portfolio of real estate assets that are high value and generate steep rent and leases.
Should real-estate-loving Indians look at REIT? All you need to know
So how does it work?
REITs generally look for large as well as small investors who want to park their money in real estate without having to buy or manage the property themselves. These investors then receive dividends which are basically the rent or lease that is divided amongst themselves.
Like in mutual funds, one is investing in a group of stocks, similarly, in REITs, you invest in a group of real estate assets. However, the main return from mutual funds comes depending on the rise or fall in the stock markets but in REITs, it comes from the rent, which is given as dividends. Another way it gives returns is capital appreciation after the prices of the properties they own rise.
What kind of buildings are under the REITs portfolio?
In India, REITs can only own commercial properties. At Least 80 percent of the properties it has invested in must be complete and rent generating while the other 20 percent can be under construction.
Distribution of dividends
One must note that for REITs in India, it is mandatory to divide 90 percent of the cash flow among investors and only 10 percent can be reinvested in real estate. In case of a sale in properties as well, 90 percent of the amount must be distributed amongst investors within a year if no other property has been bought in that period. It is also important to note that 51 percent of the revenue from REITs must come from rents.
Also, as per Sebi, the dividends have to be given once every 6 months. Some REITs also distribute their dividends on a quarterly basis.
How to invest in a REIT?
Once a REIT is listed, its shares can be bought and sold like stocks on the exchange. Apart from this, there are also specific mutual funds and exchange-traded funds that trade in REITs. Experts advise investing in such instruments for the long term since the price of real estate properties does not rise as quickly as stocks.
It is advisable for investors with a moderate to high-risk appetite who have some surplus cash.
Advantages of REITs
REITs are good investment instruments for investors looking for a steady dividend since once in at least every six months, you will receive dividends on your investment in a REIT. Over a long period of time, it also sees stable capital appreciation.
Also, since these are regulated by Sebi, REITs have higher transparency than regular real estate deals. It is audited by professionals and most of the information is available openly.
It also proves to be a great diversification tool for your portfolio. It invests directly in real estate without any hassle. Additionally, price fluctuation in other stocks does not have any impact on REITs. Moreover, in a bear market the decline in REITs is less than in stocks, and hence can help you trim some losses.
It also helps investors hedge inflation impact if invested for the long term and since most REITs are listed it is easy to buy and sell.
Risks of REITs
A key drawback of REITs is taxation. It not only does not give you any tax rebate but the dividends are also taxed. It can also be affected by market volatility and so investors with low-risk appetite must not invest. Further, since only 10 percent of its cash flow is available for reinvestment in real estate while 90 percent goes to investors as dividends, the rate of capital appreciation is slow.
REITs in India
Currently, there are three REITs listed in India. These are Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust.
Embassy: It was the first REIT to be listed on Dalal Street in April 2019 at ₹300 per share. It has risen over 15 percent till now. In March 2020, the stock hit an all-time high of ₹512, up over 70 percent, but since then it has been on a declining trend due to the COVID pandemic. The company's net worth has risen from ₹22,894 crore in 2019 to 27,093 crore in 2021. It mainly operated tech parks in Bengaluru, Mumbai and NCR.
Mindspace: It was the second one to be listed. It made its market debut in August 2020 at a listing price of ₹304. In the last one year, it has traded near the same level without any substantial rise. Its new worth has surged from ₹2,125 crore in 2020 to ₹16,303 crore in 2021. It has business parks and independent offices in four key cities - Mumbai, Hyderabad, Pune, and Chennai.
Brookfield: This is the newest one. It was listed in February 2021 at ₹275 per share. However, currently, it is trading below its listing price. Most analysts advise buying this REIT, even though it has not seen a substantial increase in stock price. However, its net worth has rallied from - ₹2,220 crore in 2020 to ₹8,203 crore in 2021. It has commercial assets in Mumbai, Gurgaon, Noida and Kolkata.
In comparison, the Nifty Realty index has surged over 85 percent in the last 1 year.
Even though there has not been a substantial rise in theshare price of REITs, analysts still advise in favor of REITS since they have continued increasing their value. Investment in REITs does not depend on their stock market return but the dividends given and that has been consistent for all three REITs as despite the COVID pandemic they are able to maintain as high as 90 percent of their tenants. Many brokerages also forecast up to a 10 percent increase in their stock prices in the next 1 year.
Overall, REITs are a good investment instrument and a diversification tool, its performance should not just be measured by rising in stock prices.
However, before investing in any REITs, one must research well and look for ones with good track records and strong dividend payouts. One must also contact an investment manager to decide if diversifying with REITs will match the goals and target set with your investment portfolio.