Real Estate Investment Trust: What is REIT?

A multitude of investment options are available in India. From financial instruments like equity, bonds and fixed deposits to physical assets like real estate and gold, investors have a wide array of options. Real estate, however, attracts the bulk of investor attention as well as money. As per a report by the Reserve Bank of India, nearly 77% of the Indian household wealth finds its way to real estate. An enduring issue with real estate investments is the limited liquidity offered by it.

Real Estate Investment Trust or REIT is the answer to most of the issues associated with real estate investments. A REIT is a company that develops, owns or finances revenue-generating real estate.

What is REIT?

If one asks what is REIT, the simplest answer would be that a REIT is a company that pools in funds from multiple individuals to invest in income-generating real estate. REITs are similar to mutual funds and allow people to invest and earn from real estate without the need to buy or manage it. Investing in real estate in India is a cumbersome process. One has to conduct thorough research and if you want to own rent-generating real estate, you will have to make substantial investments. In contrast, the structure and rules governing REITs make them extremely transparent and liquid. REIT investments can be easily liquidated as it is traded on exchanges, just like stocks. As per the rules governing REITs, 90% of the income generated has to be paid to investors as dividend and only 10% can be retained by the company. Most REITs invest in commercial real estate and lease it out. The income is distributed among investors. Mortgage REITs don’t own real estate, but finance projects. The interest earned is distributed as dividend. 

Types of REITs

– Equity REITs: The most common REITs are equity REITs. These REITs own and manage real estate. Rental income is the primary source of revenue for equity REITs.  

– Mortgage REITs: These REITs lend money to real estate developers through mortgage and loans. The interest paid by the operator for the funds is the income for the REIT. The margin between the interest paid by the developer to REIT and the interest REIT pays to lenders is the income for REITs. The income of mortgage REITs is sensitive to fluctuations in the interest rate.

– Hybrid REITs: These occupy the middle ground between equity REIT and mortgage REIT. Hybrid REITs generally deploy a part of the accumulated funds for owning real estate and the balance to provide mortgage and loans to developers.

How to invest in REIT?

REITs are listed on exchanges and one can buy units of REITs, just like the shares of a publicly listed company. Besides publicly-traded REITs, investors can also buy shares in REIT mutual funds or exchange-traded funds

Does REIT investing make sense?

India is a relatively new market for REITs. The first REIT in India was launched in 2019, even though REITs in western countries have existed for over 60 years. Considering REIT investing is a new concept in India, does it make sense to opt for REITs? REITs offer a host of unique advantages.

Low capital requirement: Quality real estate in India is prohibitively expensive. A small investor cannot buy and operate a quality property that delivers adequate yield. REITs make investing in income-generating real estate possible as each unit of REIT is relatively cheap.

Suitable for small investors: Directly investing in real estate has a number of drawbacks, the primary one being facing the powerful builders’ lobby in the country. It is not easy for a small investor to conduct proper due diligence before investing in a project. REITs completely eliminate the need to interact with developers.

Transparency: REITs are traded on the exchanges, making price discovery easy. REIT units can also be easily bought and sold without any hassles.

Assured income: REITs have to distribute 90% of the income among investors as dividends, ensuring a steady source of income.

Conclusion

REIT investing is slowly and steadily gaining acceptance in India. The first Indian REIT has witnessed strong investor participation. Large REIT funds invest in commercial projects, hotels, data centres and warehouses, which may not be possible for a common investor. REIT funds can be used for diversification of the portfolio. Investors can use REITs as an alternative to physical real estate in their portfolio.