5 min read
- What is Real Estate Investment Trust (REIT)?
- Types of Real Estate Investment Trust (REIT)
- Who Should Consider Investing in REIT?
- How to invest in REIT in India?
- Benefits & Limitations
- REIT - Charges & Fees
- Real Estate Investment Trust Vs. Traditional Real Estate
- Important Terminologies
- Conclusion
- FAQs - Real Estate Investment Trust
REIT stands for Real Estate Investment Trust, It has become a popular investment option in recent times, simplifying the process of buying, selling, and managing real estate for investors. This investment scheme allows investors to purchase a fraction of a property and become partial owners without paying the full amount. Investors can then benefit from the returns generated, proportionate to their investment. This article will provide a detailed understanding of REIT, including its meaning, types, how to invest, benefits, limitations, who should consider them, recognized REITs in India, and more. Let’s get started and understand the concept of REIT to help you decide if they’re the right investment for you.
What is Real Estate Investment Trust (REIT)?
The concept of Real Estate Investment Trusts (REITs) began in the early 1960s in the United States when President Dwight D. Eisenhower signed the Real Estate Investment Trust Act into law. This allowed individual investors to put money into large, expensive properties without needing to pay the full price or deal with the complicated process of buying, managing, and selling real estate. Investors could enjoy the profits generated by these properties without the hassle. However, the Real Estate Investment Trust (REIT) was introduced in India in 2014 by the Securities and Exchange Board of India (SEBI). The first REIT was Embassy Office Parks, which was listed in March 2019.
A Real Estate Investment Trust (REIT) is an investment scheme managed by a company or trust that operates like a mutual fund but focuses on real estate. It provides a way for investors to invest in real estate by combining funds from multiple investors to purchase properties. Investors receive shares in the REIT based on their investment amount. REITs offer a way to invest in real estate without dealing with the complexities of buying, managing, renting, or selling properties. The managing company oversees all aspects of real estate operations and provides investors with dividends from rental income or interest, as well as benefits from the appreciation in property value.
REITs typically invest in a variety of properties, including office buildings, industrial spaces, shopping malls, retail stores, apartments, hospitals, nursing homes, hotels, resorts, warehouses, manufacturing facilities, etc.
In India, the Securities and Exchange Board of India (SEBI) oversees the REIT sector, ensuring that companies adhere to its regulations before they can be listed on stock exchanges. Once a company receives SEBI’s approval, it undergoes an Initial Public Offering (IPO) and is subsequently listed on stock exchanges like the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). These are listed on the stock exchange in the same way as equity shares. After listing, investors can buy and sell REIT shares just as they would with any other publicly traded stock.
By law, REITs must pay out at least 90% of their taxable income to shareholders as dividends. This requirement allows REITs to avoid paying corporate income tax, making them a tax-efficient investment vehicle.
Types of Real Estate Investment Trust (REIT)
There are several types of Real Estate Investment Trust, including the following:
- Equity REITs: It is a type of REIT that focuses on buying properties with investor’s money, renting them out, and then distributing the rental income as dividends to investors.
- Mortgage REITs: A Mortgage REIT is different from other REITs because it doesn’t own properties. Instead, it provides loans to real estate buyers and developers. The income for a Mortgage REIT comes from the interest on these loans. After covering its operating expenses, the REIT distributes most of its earnings to investors as dividends.
- Hybrid REITs: Hybrid REITs are a mix of equity REITs and mortgage REITs. They put money into both actual properties and real estate loans. This approach allows investors to benefit from rental income and property appreciation, as well as interest income from mortgages. The income generated from both sources is distributed to investors in the form of dividends.
- Private REITs: Private REITs are not listed on stock exchanges and are not available for publicly trading. Instead, they are privately owned and generally involve a smaller group of investors. They raise capital by selling shares directly to investors, rather than through public offerings. Private REITs might provide better returns, but they also carry more risk and are harder to sell quickly.
- Publicly Traded REITs: Publicly traded REITs are regulated by SEBI and are listed on stock exchanges such as the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) in India. They are available for purchase by the general public, and their shares can be bought and sold through stock brokers, similar to other publicly traded stocks. These REITs provide high liquidity, allowing investors to easily buy or sell shares.
- Non-Traded Public REITs: Non-traded public REITs are registered with regulatory authorities, such as SEBI in India, but are not listed on stock exchanges. As a result, their shares cannot be bought or sold through regular trading platforms. However, they are available to the general public and can be purchased through brokers.
Who Should Consider Investing in REIT?
REITs are a good option for individuals who fall into any of the following categories:
- Regular Income Seekers: REITs are a great choice for people looking for a consistent source of income. They pool investors’ money to purchase and rent out properties, provide loans to real estate buyers and developers, and then distribute the earnings from interest or rental income to investors in the form of dividends.
- Individuals Seeking Diversification: Investors looking to diversify their portfolios beyond just stocks and bonds can turn to REITs as a way to invest in real estate without owning property directly. By investing in REITs, they can add real estate assets to their investment mix, benefiting from the income and potential growth of properties without having to buy or manage the properties themselves. This approach helps diversify their investments, spreading risk across different types of assets.
- Small Individual Investors: Real estate investment usually demands a large amount of capital, which can be out of reach for small investors. However, REITs make it possible for these investors to invest in real estate with a much smaller amount of capital. With REITs, individuals can invest in real estate starting from as low as INR 500, enabling them to benefit from returns on large and costly properties.
- Long-Term Investors: Over time, real estate has consistently been one of the best investment options. For those looking for long-term real estate investments, REITs provide a great opportunity. REITs allow individuals to invest in real estate and also use part of their earnings to buy new properties or upgrade existing ones. This reinvestment helps drive further growth and can increase the value of their shares. Consequently, REITs are an excellent choice for people looking to build wealth gradually through the rising value of real estate over the long term.
- Passive Income Seekers: Individuals who prefer to earn money without actively managing their investments might find REITs beneficial. In a REIT, funds from multiple investors are gathered and overseen by a company or trust with real estate experts. These professionals manage the pooled money and invest it into real estate. The REIT handles property management and provides investors with dividends from rental income or interest. Additionally, Investors can also benefit from the rise in the value of their REIT shares.
- Liquidity seekers: Investors who want to invest in real estate for attractive returns but also need quick access to their money can benefit from publicly traded REITs. Since these REITs are listed on stock exchanges, they can be bought or sold with just a few clicks, similar to stocks. This ease of transaction allows investors to enter or exit their investments quickly, avoiding the complexities and delays often involved in buying or selling physical properties.
How to invest in REIT in India?
As an investor, you can invest in REITs through both online and offline methods, but online investing is generally preferred. Here are the steps to invest in REITs online:
- Open a Demat Account: Choose a registered brokerage firm that allows investment in REITs. In India, reputable brokerage firms that offer this facility include Kite by Zerodha, Groww, Upstox, and Angel One. Once you’ve chosen a broker, set up both a demat and trading account with them to begin investing in REITs.
- Research Available REITs: Research available REITs to understand their investment focus, performance, and potential returns. Some of the key REITs in India include Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust.
- Place an Order: Access your trading account via the broker’s platform or app. Search for the REIT you want to invest in, choose the number of units you wish to purchase, and place your order.
- Track Performance: Regularly monitor the performance of your REIT investment through your broker’s platform. If you want to sell, navigate to the investment holdings section, select the REITs you wish to sell, and place a sell order.
Benefits & Limitations
Benefits:
- Regular Income: REITs generate income by renting out properties or earning interest on loans provided to real estate buyers and developers. This income is subsequently paid out to investors in the form of dividends. REITs typically offer an attractive dividend yield, usually paid quarterly, making them a good option for those seeking a regular income source. By law, REITs must distribute a minimum of 90% of their taxable income to shareholders as dividends.
- Liquidity: Publicly traded REITs offer liquidity comparable to stocks, enabling investors to buy and sell REIT shares with just a few clicks.
- Professional Management: REITs are managed by experienced professionals who handle all aspects of property investment, including purchasing, managing, leasing, and selling. These experts bring specialized knowledge and skills, which can enhance the REIT’s performance and potentially deliver higher returns to investors.
- Accessibility: REITs let individual investors take part in big real estate deals that they couldn’t access on their own. This allows smaller investors to earn returns from large real estate investments.
Limitations:
- High Fees: A Real Estate Investment Trust charges management fees and other operational costs that can reduce overall returns for investors.
- Liquidity Constraints: Publicly traded REITs are generally quite liquid, but non-traded public and private REITs may have lower liquidity. This means it might be harder to sell shares quickly or at a desired price.
- Property-Specific: For equity REITs, specific property limitations include vacancies, tenant defaults, and the costs associated with property maintenance and damage. Poor performance of individual properties—whether due to high vacancy rates, tenants failing to meet their lease obligations or significant maintenance and repair expenses—can negatively impact the overall returns of the REIT.
- Market Volatility: Publicly traded REITs can be impacted by market fluctuations, meaning their share prices may be influenced by overall stock market movements.
REIT - Charges & Fees
Some of the common fees associated with REITs include:
- Management Fees: This is a type of fee charged for overseeing the REIT’s operations and managing its properties. This fee compensates the management team for their expertise and efforts in ensuring the REIT operates smoothly, optimizes property performance, and maximizes returns for investors.
- Acquisition Fees: Acquisition fees are charges incurred during the process of acquiring new properties. These fees cover expenses related to purchasing real estate assets and are paid to the management team or external advisors who handle the tasks of identifying, negotiating, and finalizing property transactions.
- Performance Fees: Performance Fees are compensation paid to the management team of a REIT (Real Estate Investment Trust) based on the performance of the REIT’s investments. These fees are designed to align the interests of the management team with those of the investors by rewarding the team for achieving or exceeding specific performance benchmarks.
- Administrative Fees: Administrative fees cover the costs associated with managing the day-to-day operations and administrative functions of the REIT. These fees support essential activities such as compliance, record-keeping, auditing, and tax reporting.
- Trading Fees: To buy or sell REIT shares through stock brokers, investors must pay various fees, including brokerage fees, securities transaction tax (STT), stamp duty, and other associated costs.
Real Estate Investment Trust Vs. Traditional Real Estate
1. Ownership
- REIT: Investors don’t directly own the properties but instead receive shares of a REIT based on their investment amount. They earn rental income through dividends and benefit from property value increases via the appreciation of REIT shares.
- Traditional Real Estate: Investors can directly own properties in their own name, but they are responsible for managing everything themselves, including finding, buying, renting, maintaining, repairing, and selling the properties.
2. Liquidity
- REIT: Shares of publicly traded REITs are listed on stock exchanges, enabling investors to buy or sell them through stockbroker platforms with just a few clicks, offering high liquidity.
- Traditional Real Estate: Physical properties can take a significant amount of time to buy or sell and involve extensive paperwork, making them less liquid.
3. Amount of Investment:
- REIT: With REITs, you can invest in real estate with a relatively small amount of money, starting from as low as ₹500 by purchasing fractional shares.
- Traditional Real Estate: Purchasing physical real estate usually requires a significant amount of money, which may be beyond the reach of many individual investors.
4. Income and Returns
- REIT: Investors can earn returns through dividends, which come from rental income or interest, as well as from the appreciation of their shares.
- Traditional Real Estate: A property owner can earn returns from renting out the property and from the appreciation of the land’s value.
5. Tax Consideration:
- REIT: By law, a Real Estate Investment Trust must distribute 90% of their taxable income as dividends to investors. These dividends are taxed as ordinary income according to the investor’s tax slab rate. Additionally, if REIT shares are sold within 36 months of purchase, short-term capital gains tax is applied at a rate of 15%. Conversely, if the shares are sold after holding them for more than 36 months, long-term capital gains tax is applied at a rate of 10%.
- Traditional Real Estate: Traditional real estate taxation encompasses several types of taxes. When purchasing property, buyers typically face stamp duty, which is a tax based on the property’s sale price, and registration charges for officially recording the property transfer. If you purchase the property directly from a builder, GST will also be applied. Property owners are required to pay property taxes annually, based on the assessed value of their property. Income earned from renting out the property is subject to income tax. If the property is sold within 24 months of purchase, any gains are taxed as short-term capital gains according to the individual’s income tax slab rate. For properties sold after 24 months, the gains are classified as long-term capital gains and taxed at 20% with indexation benefits or 12.5% without indexation.
Important Terminologies
- Asset Management Fees: Fees charged by the REIT’s management company for overseeing the REIT’s investments and overall portfolio strategy.
- Gross Rental Income: The total rental income generated from properties owned by the REIT before deducting expenses and operating costs.
- Occupancy Rate: The percentage of a REIT’s properties that are currently leased out to tenants. Higher occupancy rates generally indicate better property performance and higher rental income.
- Dividend Payout Ratio: The proportion of the REIT company earnings that is distributed to shareholders in the form of dividends.
- Diversification: The strategy of investing in a variety of property types and locations to spread risk and enhance the stability of returns.
- Net Operating Income (NOI): The total revenue generated from a property, minus the operating expenses, excluding taxes and interest. NOI is used to assess the profitability of income-producing properties.
- Initial Public Offering (IPO): The process through which a REIT offers its shares to the public for the first time, allowing investors to buy shares on the stock exchange.
Conclusion
Real Estate Investment Trust (REIT) provides a convenient way to invest in real estate without the need to directly own or manage properties. They operate by gathering funds from multiple investors to purchase and manage properties that generate income. This allows investors to earn from both rental income and property value growth. There are various types of REITs, such as equity REITs, mortgage REITs, and hybrid REITs, each with its own set of benefits and characteristics.
Publicly traded REITs are especially appealing if you want liquidity, diversification, and professional management. They are listed on stock exchanges, which makes buying and selling REIT shares simple and easy. They also offer regular dividends and have a lower barrier to entry compared to buying property directly.
Before investing, it’s important to research the different types of REITs, understand their specific features, and think about how they fit with your financial goals and risk tolerance.
FAQs - Real Estate Investment Trust
Q1. Where does investor’s money get invested with REITs?
A1.The basic concept of a Real Estate Investment Trust (REIT) is to pool money from multiple investors to invest directly in real estate properties. This money is used to acquire, manage, and profit from various income-generating properties. However, there is also a type of REIT called a mortgage REIT, which works differently. Instead of buying properties, mortgage REITs provide loans to real estate buyers and developers. They earn income through the interest on these loans and distribute the earnings to investors in the form of dividends.
Q2. Investing in Real Estate Investment Trust a good option in India?
A2. Yes, REITs are a good investment option in India. They allow you to invest in a diverse range of real estate assets, which helps reduce risk compared to buying individual properties. Publicly traded REITs on Indian stock exchanges offer easy buying and selling, similar to stocks. They usually provide regular income through dividends from rents and property value increases. Additionally, Indian REITs are regulated by SEBI, ensuring transparency and protection for investors. While REITs have shown strong returns in the past, it’s important to do thorough research before investing.
Q3. How Will I Receive Dividends from REITs?
A3. Dividends from REITs are directly credited into the investor’s bank account linked with their brokerage firm.
Q4. In whose name does a REIT buys a property?
A4. A REIT buys property in its own name, not in the individual names of its investors. The REIT, as a legal entity, owns and manages the properties on behalf of the investors.
Q5. Is TDS deducted on dividends received from REITs?
A5. Yes, TDS (Tax Deducted at Source) is deducted on dividends received from REITs in India at 10% if the dividend amount exceeds ₹5,000 from a single REIT in a financial year.
Q6. What was the first REIT introduced in India?
A6. The first REIT introduced in India is Embassy Office Parks REIT, which began in March 2019.
Also Read
