Planning to invest in real estate? Here’s why you should consider REITs!

by Divya Sankar

Ever felt like signing title deeds and rent agreements was the only way to “own” real estate?

Wrong! Here’s a new and alternate way to invest in real estate — REITs!

What are REITs?

Real Estate Investment Trusts (REITs) are an investment product that allows people to put money into the real estate sector without actually having to own or maintain land or property.

They pool funds from many different people to invest in larger, income-generating properties. The “Trust” part just refers to the company managing your REIT, just like how Mutual Fund “Houses” refer to the company managing your mutual fund investments.

REITs in India are fairly recent, the earliest of which started in 2017. There are currently 3 Trusts registered with SEBI — Embassy REIT, Brookfield REIT, and Mindspace REIT — but they’re catching up fast to other investment products.

How are they different to conventional real estate?

Conventionally, investing in real estate would probably mean affording and leasing an apartment in a Tier 1 or 2 city along with footing maintenance costs and broker fees.

But REITs make it possible for you to:

(a) Invest in many larger properties like office or apartment buildings

(b) Forgo costs like maintenance fees or having to worry about upkeep; and

© Have all the benefits of a professionally managed fund

The key difference between REITs and Mutual Funds, however, is that REITs can be bought and sold on the stock market.

How do they work?

In India, REITs are pretty heavily regulated which is actually good news for investors. In order to qualify as a REIT, trusts need to spend 80% of their pooled investments on properties that regularly generate income — either through rent or things that appreciate in value. They’re also mandated to distribute 90% of the income they collect through those properties to their shareholders as dividends.

It actually works out to be a pretty simple cycle.

- You (the shareholder) invest your money into a REIT.

- The Trust uses that money to buy property that they later lease out to actual tenants.

- Tenants pay rent back to the REIT (usually on a monthly basis), and 90% of that rent goes back to the shareholders.

How have they been performing?

Despite the pandemic, REITs have been seeing a gradual upward trajectory. Since October 2021, for example, REITs have been included in some of the popular Nifty indices and have registered strong growth since the onset of the pandemic, prompting the Securities and Exchange Board of India (SEBI) to revise some of the rules around REITs.

Despite their introduction as recently as 2017, REITs outperformed the Sensex and the BSE Realty Index and a portion of small, mid-, and large-cap mutual funds until the onset of the pandemic.

Fun Fact: Since its inception in 2017, Embassy REIT is now Asia’s largest REIT in terms of area covered. They even saw a 18% rise in their YOY growth in just 2021–2022. So far, both Embassy and Mindspace REIT have yet to drop below their IPO share price in 5 years and 3 years of operating, respectively.

What’s the catch?

Here are a few pros and cons.

Pros

Transparency.

Portfolio managers of your REIT are required by law to be transparent about their expenditures and strategies, unlike mutual fund houses.

Dividends.

You can get a regular monthly/quarterly income through dividends.

Risk mitigation.

Annual returns will remain low but less risky than investing in physical real estate, given the highly structured nature of REITs.

Buying and selling.

Buying and selling REITs is much faster and easier than selling solid, brick-and-mortar real estate properties. REITs offer a fair degree of liquidity at a relatively low cost, making them an attraction for retail investors (like you and me).

Cons

Entry price.

Investors need at least INR 10–15,000 to invest in REITs, according to SEBI’s revised rules. That’s no pocket change!

Volatility.

By virtue of being listed as a stock, REITs are subject to volatility in the market. They can move down just as quickly as they can come up.

Capital Appreciation.

REITs’ appreciation versus traditional real estate assets has been comparatively low (in the Indian market, at least).

SALT Tips: Factors to consider before you invest

Taxation.

Returns made from REITs as dividends and interest will be taxed in accordance with your income tax slab. But capital gains will be taxed either as long-term (if sold after 3 years post-purchase) or short-term (less than 3 years) without indexation benefits.

Management Fees.

Fund managers do charge a regular fee for REITs — understand the fee structures and what they’ll mean for your investment value.

SALT Tip:

- When making any investment, always look for and understand the charges, fees, taxes, and costs. This is money you’re paying as an investor for a service.

- Don’t fuss over tax! First off, you only pay tax when you make gains. Secondly, taxes are a part and parcel of life (and investing). You’re gonna have to pay them, so just be aware of the tax implications of your investments over other alternatives, but don’t fuss over them.

Either way, REITs are an option to diversify your investments or to gain a regular income through dividends.

Is it a replacement for buying a house though?

That’s based on your housing needs. You can’t live in a REIT property as they’re mostly commercial, meant for large corporates and MNCs with long-term contracts. If you want to create an asset to pass on to your family, however, REITs may not be “reit” for you.

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