Should You Invest in REITs?
Today’s investors have several investment options to fulfill their different goals: income generation or building wealth. And REITs are one such new investment avenue.
From a global context, REITs are nothing new. But it is a relatively new investment option for Indian investors. While REIT is still in its nascent stage in India, many industry leaders believe the sector will continue to grow.
What is REIT?
REITs are investment options that invest in real estate and infrastructure projects, respectively. It can also invest in the loans that back these real estate and infrastructure units.
Simply put, REITs are like mutual funds. REITs invest in properties from the money pooled by investors like us instead of stocks and debt instruments.
Structure of REIT
Let us assume that company A built a commercial complex but wants to exit it. They may want to exit for various reasons.
So, another company will form a REIT trust that will pool small amounts of money from individuals and institutions to invest in the complex. Investing can be done directly through a trust or Special Purpose Vehicles (SPV). An SPV is a company or limited liability partnership (LLP) in which a REIT owns or intends to own at least a 50% equity stake or interest. Besides holding and developing property and any incidental activity, an SPV is prohibited from engaging in any other activity.
Criteria to qualify as a REIT
Here are some criteria that a REIT needs to meet to qualify as REIT per SEBI guidelines 2019:
- The REIT needs to have an asset base of at least Rs.500 crore.
- REIT should hold a minimum of 50% of the total nominal value of equity in that SPV.
- It should distribute 90% of net distributable cash flow to investors as interest or dividends.
- The REIT needs to invest 80% of the investment in income-generating assets, i.e., projects that are already completed.
- REITs in India cannot invest in vacant land or agricultural land.
Advantages of REIT over traditional real estate investment
- REITs are an affordable real estate investment option. Traditional real estate investment options require a lot of money upfront.
- Traditional real estate investment involves paperwork and making rounds of government offices. In comparison, REITs make real estate investment as easy as investing in mutual funds or direct stocks.
- Finding a suitable buyer and exiting a property may take months or even years. REITs have lower liquidity risk, as you can redeem your units quickly and get the money credited to your bank account.
- The capital market regulator SEBI regulates REITs, and so there are minimal chances of fraud.
- REITs are also transparent as they have to disclose the capital portfolio on an annual and semi-annual basis.
- REITs provide a higher dividend as it needs to distribute 90% of its income as dividends to investors.
How to invest in REIT in India
Embassy Business Park REIT, Mindspace Business Parks REIT, and Brookfield India REIT are the three listed REITs in India. The number of REITs may increase in the coming years.
You can invest in REITs and buy units like regular stock. SEBI has stated that they should reduce the minimum investment amount in a REIT to Rs.10,000-15,000, with a revised trading lot of one unit. Earlier, the minimum investment amount was Rs.50,000, with a secondary market trading lot of 200 units.
You can get exposure to REIT by investing in REIT mutual funds. Currently, you can invest in the Kotak International REIT fund and get the benefits of investing in Indian and international REITs.
Conclusion
REITs can be an alternative investment option for investors looking to diversify their investment portfolios. However, as it is a little more complicated investment option than mutual funds or any other investment option, it would be best to talk with your financial advisor before investing in a REIT.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.
