Real estate is one of the vital sectors of the Indian economy. REIT is an investment vehicle that enables individual investors to earn income via the underlying real estate property. They do this without directly owning the property. It is similar to the concept of a mutual fund. Where a fund pools small sums from individuals and institutions and invests in stocks. The investments take place through a trust directly or via Special Purpose Vehicles (SPV). In REIT, the trust puts money in property. REITs own many types of commercial assets ranging from office spaces to hospitals, shopping centers, hotels, and warehouses.
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 rents.
Commonly known as mREITs, it mostly involves itself with lending money to proprietors and extending mortgage facilities. 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.
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) 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 are are exempt from SEC registration and whose shares do not trade on National Stock Exchanges. These trusts function as private placements, which caters to a selective list of investors.
REITs need to meet the below criteria for their qualification as per SEBI guidelines 2019:
Following are the benefits of investing in REIT:
Option to Divesify
As REITs are usually traded on stock exchanges, it gives the investors the benefit of diversifying their real estate portfolio.
Dividend Income and Capital Appreciation
Individuals investing in REIT get the benefit of steady and substantial dividend income and over the long term, it also allows steady capital appreciation.
As REIT 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 in generating 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.
Just like any other stock, investors can buy shares in a particular REIT in three ways:
Stocks: Individuals who are looking for investing in a direct way in REIT go for this option.
Mutual Funds: Investors who wish to have a diversified portfolio invest in REIT 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.
The dividend received was earlier tax-free in the hands of the investors. However, Finance Minister Nirmala Sitharaman in Budget 2020-21 scrapped the dividend distribution tax for companies and shifted the burden on investors. While nothing changes for SPVs and the trusts as they still won’t pay tax, unitholders of REITs are no longer exempt.
-Concern over the demand for office space as some companies are planning to continue with the work from home (WFH) model adopted to battle the covid-19 infection attributes to fall the value of REIT.
– Also, the change in the income tax law, making dividend income taxable in the hands of some investors, will make REITs less attractive.