REITs: Your Gateway To Invest In Real Estate 'Without' Actually Buying A Property

We youngsters, who are nowadays referred to as the millennials and Gen Z, often have a different take on many aspects of life when compared to previous generations. Whether it's about how we are more adaptive towards passive income ideas, follow the YOLO motto when it comes to living life, and increasingly preferring to retire early as well, our preferences when it comes to money differ a lot from the previous generations.

Be that as it may, one thing that often acts as a glue and has largely remained as a common interest for most generations is the power of real estate.

Whether it's our parents, grandparents or us, this asset in the form of real estate is or has been a common element in most of us¡¯ investment portfolios. But what if we told you that you can invest in real estate without going through the hustle of finding and actually buying the ¡®right' property? Sounds crazy, right? After all, real estate is all about owning property...

This is where REITs comes in! This relatively new but promising investment vehicle has been gradually transforming the real estate sector. Read on as we unfold the concept of REITs.

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Real Estate Investment Trust (REITs)

REITs are companies that own, operate or finance income-producing real estate. They were created with the main purpose of channelising the funds that could otherwise be invested in operational functions or ownership of the real estate, into further income generation for the investors, thus making them an investment vehicle.

Just like mutual funds invest your money into securities like equity, debt, money market instruments etc., REITs invest in real estate and are listed on stock exchanges.

Simply put, when you invest and buy a unit of REIT, it represents partial ownership of that real estate asset held by the trust, thus entitling you, the unitholder, to a share of the income generated by the REIT.

While the governing rules surrounding REITs are time to time being tweaked and updated in order to make them more investor-friendly and increase the scope of these investment instruments in India, currently a company can qualify for being REIT if it satisfies these conditions:

#1 90% of the REIT¡¯s income must be distributed to the investors in the form of dividends

#2 80% of the investment by REIT must be made in revenue-generating projects and properties. Rest 20% can include an allocation to investments in under-construction properties, mortgage-based securities, equity shares deriving at least 75% of income from real estate activities, government securities, money market instruments, cash equivalents, etc.

#3 Only 10% of the total investment of REIT should be made in real estate under-construction properties

#4 The REIT must have an asset base of at least Rs 500 crore

#5 REITs must update the NAVs twice in every financial year

Also, as per guidelines, there is a full valuation of the REIT every year along with a half-yearly audit, to ensure transparency. And to promote diversification, REITs have to invest in at least two projects with the value of one asset comprising 60% of the investment.

Also Read: From Real Estate To PPF: Top Investment Options To Help Millennials Retire Early

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History of REITs

Although REITs were first introduced in the USA in the 1960s, it was much later in 2007 that they were first introduced in India by SEBI (Securities and Exchange Board of India), almost five decades after they were first incorporated as an investment vehicle.

Subsequently, there has been continuous framing of regulations to facilitate the operational functions of REITs in India. REIT companies listed on the Indian stock exchanges are monitored and regulated by SEBI, just like mutual funds.

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How to invest in REITs?

Just like ETFs, Exchange Traded Funds, REITs are listed and traded on stock markets, and as a result, purchasing units on the stock market is amongst the best way to invest. That is why a demat account is mandatory for investing in REITs in India.

And just like ETFs, the price of REITs units on stock markets changes depending on both the demand for units and the performance of the REIT.

At present, investors can invest in three REITs in India, which include:

Embassy Business Park REIT, Mindspace Business Parks REIT and Brookfield India REIT.

Besides stock market purchases, you can also invest in REITs through mutual funds. There are few international and domestic funds that have been investing varying proportions in REITs, which can be invested in if you wish to dip your feet into REITs in India.

Also Read: Child's Higher Education v/s Your Retirement: Which One To Prioritise As A Parent?

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How Do REITs Generate Returns?

REITs provide both the benefits of wealth creation and regular income to unitholders. Investors can receive periodic dividends and/or interest payouts that provide regular income and at the same time, the sale of REIT units on stock markets can provide capital gains to the investor.

While the dividend and interest payouts are done by REITs from their Net Rental Income, the capital gains are earned as the REITs are listed and traded on stock exchanges, so the price of individual units changes depending upon their performance as well as market demand.

So just like equity stocks and mutual funds, good performance by an REIT leads to an increase in the price of REIT units that can hence be sold at a profit and provide capital gains to the investor.

SEBI¡¯s Steps To Encourage Investors

To encourage investors, SEBI has made two significant amendments to the rules of investing in REITs in India.

Initially, there was a minimum requirement of ?50,000 for an investor to invest in units of REITS. But this has been done away with and now, the minimum investment criteria is ?10,000-15,000.

Second, the minimum lot size of REITs traded has been reduced to 1 unit, which not only brings it at par with equity shares but is also expected to increase liquidity for the entire REIT market

Also Read: 5 'Not So Known' Ways To Add The Glitter Of Gold To Your Portfolio in 2022

Still A Relatively New But Growing Market In India

Although REITs are still a relatively new asset class in the Indian markets and many investors are unaware of it, steps are being taken to make them more accessible to retail investors through relaxations in terms of minimum lot size and investment value.

Ever since their launch in April 2019, Indian REITs have been aiming to pave the way for retail investors to participate in the commercial real estate sector. And the various steps being taken by SEBI towards REITs are also in the same direction, to encourage more investors to enter the REIT market.

Overall, this promising investment vehicle can boom in the future and let investors enjoy the benefits of real estate investment without actually purchasing a property directly. As this asset class begins to gain prominence, its structure, concept, returns, risks and other key aspects will gradually become clearer and polished, to fill whatever loopholes which might be present or come up as the market grows.

Also Read: Does It Make Sense To Invest Your Surplus Or Prepay Existing Home Loan With It

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