Real estate is one of the vital sectors of the Indian economy which has contributed a lot to rapid economic growth. However, investing in real estate is not easy as it involves huge investments. For small and retail investors to participate in real estate, Real Estate Investment Trust(REIT) is the best investment option. REIT is an investment vehicle that enables individual investors to earn income through real estate without having the hassle of managing the properties physically or shelling out huge monies.
What is a REIT?
REIT is an investment vehicle that raises funds from sponsors and investors and invests in income-generating properties ranging from office spaces to hospitals, shopping centres, hotels, and warehouses. The REIT either directly or through a Special Purpose Vehicle (SPV) invest in real estate properties and generate income either by renting out or by giving loans. The concept of REIT is similar to Mutual Funds that pool small sums from individuals and institutions and invest in stocks. The unitholders earn in the form of dividends and interest distributed by the REIT.
Types of REIT
- Equity
It is the most popular type of REIT. The majority of REITs are publicly traded equity REITs. Equity REITs own or operate income-producing commercial properties. The common source of income here is rent.
- Mortgage
It is mostly involved in lending money to proprietors and extending mortgage facilities and is commonly known as mREITs. REITs provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments. Mortgage REITs also generate income in the form of interest accrued on the money they lend to proprietors.
- Hybrid
Investors can diversify their portfolio by parking their funds in both mortgage REITs and equity REITs. Hence, both rental income and interest income are the sources of income for this particular kind of REIT.
- Public non-listed REITs (PNLRs)
Public non-listed REITs (PNLRs) are registered with the SEBI. However, they are not tradable on the National Stock Exchange. These options are less liquid. Also, they are more stable as they are not subject to any market fluctuations.
- Private REITs
Private REITs are exempt from SEC registration and whose shares do not trade on National Stock Exchanges. These trusts function as private placements, which cater to a selective list of investors.
Compliances
REITs need to fulfill the below compliances for their qualification as per SEBI guidelines 2019:
- The company must have an asset base of at least 500 Crores.
- For an Asset to qualify as an SPV (Special Purpose Vehicle), REIT shall hold controlling interest and at least 50% of the total nominal value of equity in that SPV.
- Distribution of 90% of net distributable cash flow to unit-holders in the form of interest/dividend.
- 80% of the investment should take place in income-generating assets. Furthermore, only 20% of the total investment can take place under-construction assets, equity shares, bonds, etc.
Advantages of Investing in REIT
The following are the benefits of investing in REIT:
Option to Diversify
As REITs are usually traded on stock exchanges, it gives investors the benefit of diversifying their real estate portfolio.
Dividend Income and Capital Appreciation
Individuals investing in REITs get the benefit of steady and substantial dividend income and over the long term, it also allows steady capital appreciation.
Liquidity
As REITs are mostly traded on stock exchanges, it becomes very easy to buy and sell them, hence adding the benefit of quick liquidity.
Risk-Adjusted Returns
REIT offers its investors the advantage of earning risk-adjusted returns that help generate a steady force of income for them. During the time of high inflation, investing in REIT can help in having a steady source of income.
How to Invest in REIT?
Just like any other stock, investors can buy shares in a particular REIT in three ways:
Stocks: Individuals who are looking to invest in a direct way in REIT go for this option.
Mutual Funds: Investors who wish to have a diversified portfolio invest in REITs through mutual funds.
Exchange-Traded Funds: This option is for those investors who want to avail indirect ownership of properties and also want to benefit from its diversification.
Taxability
Taxability of REITs
- REITs have a pass-through status u/s 10(23FC) w.r.t interest receivable from an SPV or dividend. Pass-through status means the income will be distributed to the unitholders and will be taxable in their hands making it exempt for REITs.
- Any income of a business trust by way of renting or leasing of any real estate asset directly owned by the trust is exempt u/s 10(23FCA).
- The total income of a business trust consists of interest and dividend income from SPVs, rental income if it holds rent-generating assets, investment income from funds/FDs where surplus money is available, capital gains under section 111A and section 112
- All other incomes apart from capital gains shall be chargeable to tax at a Maximum Marginal Rate (i.e. 42.744%)
In the hands of Unit Holders
- Section 115UA of the Income Tax Act governs the taxability of unit-holders
- Income distributed by business trust to its unit holders shall be treated of the same nature. The treatment shall be in the same proportion as it is receivable by the trust
- The dividend income from REITs will be taxable in the hands of the unitholder only when the SPV has opted to pay taxes at a concessional rate of 22% u/s 115BAA.
- Whereas if the trust repays principal to unit-holders, it shall be treated as capital receipts. When calculating capital gains on the sale of units, such repayment will be reduced from the cost of acquisition.
- Transfer of units by unit-holders shall be chargeable to Capital Gains Tax at applicable rates
- Any short-term capital gains arising on the transfer of units shall be chargeable to tax at 15 per cent. Long-term capital gain is taxable at 10% if the amount exceeds INR 1 lakh.
FAQ
Yes, if the underlying SPV in which the REIT has invested opts for Section 115BAA concessional tax scheme, then the dividend will be taxable in the hands of unitholders.
The majority four listed REITs in India are:
1. Brookfield India Real Estate Trust
2. Embassy Office Park REIT
3. Mindspace Business Park REIT
4. Nexus Select Trust
The major source of income for REITs is Rent. Apart from that they also earn from dividends declared by SPVs and interest on debt given to SPVs.
Originally published at: REIT : Real Estate Investment Trust - Learn by Quicko
Real estate is one of the vital sectors of the Indian economy which has contributed a lot to rapid economic growth. However, investing in real estate is not easy as it involves huge investments. For small and retail investors to participate in real estate, Real Estate Investment Trust(REIT) is the best investment option. REIT is…
Hey @Shweta_Saini
Unit-holders receiving any income distributed by trusts such as interest or dividend shall be treated as income of the unit-holder for that previous year subject to provisions of the Act.
You can read more about it here:
Hope this helps!