Real estate investment trusts (REITs) have become a rising choice for small investors to take exposure to the real estate sector. This blog will deal with the basic details of REITs and its advantages and disadvantages.
What are REITs?
Haven’t heard of it? Do not worry, we have got you covered. A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership without actually having to buy, manage, or finance any properties themselves.
When you invest in mutual funds, you get a basket of stocks(A small part of many stocks). Similarly when you get a REIT, you essentially buy a basket of real estate properties. Sounds interesting, doesn’t it? Let’s learn further!
How REITs Work?
- Pooling Funds: REITs collect money from many investors. This pooled capital is then used to purchase and manage a portfolio of real estate assets exactly how a mutual fund works.
- Types of Properties: These can include commercial properties like office buildings, shopping malls, apartments, hotels, and even healthcare facilities.
- Fractional Ownership: Instead of buying an entire property, investors buy shares of the REIT, similar to how they would buy shares of a company in the stock market. This allows investors to own a fraction of large-scale properties.
Why Invest in REITs?
Accessibility: REITs allow investors with limited funds to participate in the real estate market. Traditionally, real estate investments require large ticket size (significant capital), but with REITs, investors can start with much smaller amounts.
Diversification: By investing in a REIT, investors can spread their investment across a diversified portfolio of properties in the prime areas. This reduces the risk associated with investing in a single property.
Regular Income: REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends. This means investors receive regular income from their investments.
Capital Appreciation: Over time, the value of the properties owned by the REIT can increase, leading to capital appreciation. Investors can benefit from both income (dividends) and growth (appreciation).
Comparison with Mutual Funds
| Criteria | REITs | Mutual Funds |
| Investment | Mutual funds collect money from retail investors to buy stocks from various companies and sectors. | REITs collect money from investors to buy, manage, and sell properties. |
| Management | A fund manager selects and manages these stocks. | Managed by real estate professionals. |
| Return | Investors earn returns based on the performance of the stocks in the fund. | Investors earn returns through rental income and property appreciation. |
Advantages of REITs
- Fractional Ownership: Investors can own a portion of large properties, including offices, residential complexes, and plots.
- Dividend Income: REITs distribute at least 90% of their taxable income to shareholders, providing regular income (Passive income).
- Diversification: Investment is spread across multiple properties, reducing risk.
- Liquidity: REITs are traded on stock exchanges, so investors can buy and sell shares easily.
- Professional Management: Properties are managed by experienced professionals, ensuring optimal performance.
REITs in India
This concept is relatively new in India, with the first REIT launched in 2019. Despite this, REITs have gained popularity due to their potential for providing regular income and capital appreciation. Some notable examples in India include Embassy Office Parks, Mindspace Business Parks, and Brookfield India.
Investment Requirements
- Regulation: 80% of the investment must be in completed and income-generating properties which makes these investments relatively safe.
- Income Distribution: REITs must distribute 90% of their income to shareholders.
- Tax Benefits: Investors can benefit from certain tax exemptions.
Example:
Embassy REITs in India offer a dividend yield of 6-7%(approximately), making it an attractive investment option for income-seeking investors.
Challenges and Risks
- Market Uncertainty: This market in India is still relatively unknown and comes with uncertainties.
- Economic Risks: Real estate investing, is primarily debt-oriented, making it risky during economic downturns.
- Regulatory Challenges: The Indian real estate market is opaque, and laws are weak, leading to complications and challenges in understanding returns.
- High Leverage: REITs are highly leveraged and involve significant risks, especially in economic downturns.
Alternatives Investment Options in India
While REITs offer a way to invest in real estate with limited capital, there are alternative options that may be more suitable for some investors.
- Investing in Tier Two or Tier Three Cities: Commercial properties in these cities can be a good real estate investment option.
- Real Estate Stocks: Investing in companies that operate in the real estate sector can provide exposure without the need to own physical property.
- Airbnb Business: Starting an Airbnb business in India can be a lucrative alternative to traditional real estate investments.
Real Estate Stocks allow an investor to be exposed to the real estate market without having to actually deal with properties. Airbnb offers more competitive returns, with the possibility of short-term rental.
Frequently Asked Questions [FAQs]
In India, REITs are similar to mutual funds but invest in real estate assets. They collect funds from investors and invest in income-generating properties.
Yes, individual investors can invest in REITs through stock exchanges where REIT units are listed and traded.
Unlike direct real estate investments, REITs provide greater liquidity, professional management, and the ability to invest in a diversified portfolio of properties.
Conclusion
REITs are a way to invest in real estate with minimal capital, as they offer fractional ownership and provide dividend yield and capital appreciation as well. It should also be admitted that there are risks and difficulties in working with REITs, especially in the Indian market. The investment of this amount in other alternative investment opportunities or in alternative real estate stock investments could provide better returns with a very low level of risk, even from creating an Airbnb business.
Investors must be able to carefully consider their individual objectives, financial positions, and special market conditions before investing in REITs or any other investment related to real estate. If you are considering to buy a property, you should get a home loan. Feel free to reach out to our team of experts incase of any queries.
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