Are REITs the Right Option for You?

Posted On February 3, 2023

What are REITs?

In this article, Save Max Real Estate describes REITs – a reasonably new entrant in Indian real estate investments.

Real Estate Investment Trusts are a popular investment option for those seeking exposure to the real estate market. REITs are publicly listed companies that own and operate income-generating real estate assets.

A REIT allows investors to invest in diverse real estate assets, including commercial, residential, and mixed-use properties. These trusts are investment vehicles that enable multiple investors to invest in a diversified real estate portfolio. A professional manager is responsible for managing the assets on behalf of the investors.

SEBI Approval

The Securities and Exchange Board of India regulates the securities market in India. SEBI is responsible for approving REITs and ensuring they comply with the regulations per the SEBI Real Estate Investment Trusts Regulations, 2014. The approval includes regular reporting and disclosure requirements and rules on related party transactions and governance.

SEBI reviews the prospectus and other documents submitted by the REIT sponsor and conducts due diligence to ensure that the REIT complies with the regulations. Once SEBI approves a REIT, it can be listed on a stock exchange and made available for investment by the public.

REITs in India

India has only three listed REITs – Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust – all relating to commercial real estate, mainly office spaces for rent. 

Bearing in mind that this is still in its exploratory phase, other real estates, like retail, residential, hospitals, hotels, etc., are expected to be added soon. There is growing interest in this investment avenue, with US-based fund house Blackstone and its partners – Pune-based Panchshil Realty and Bengaluru-based Salarpuria Sattva looking to float a REIT soon.

Investing in REITs as a Beginner

If you are looking at investing in REITs in India, here are some tips you should follow:

1. Research: It is essential to research the different REITs available in India and compare their performance, management, and portfolio of assets.
2. Choose a brokerage: A brokerage account is required for REIT investment options, so look for a brokerage that best fits your needs.
3. Decide on an investment strategy: You can invest a single, one-time sum or set up a regular investment plan through your brokerage.
4. Monitor your investment: Regularly monitor your investment to ensure it performs as expected.

Benefits and Drawbacks 

It is essential to consider the risks associated with REITs before you invest money. There are several advantages and a few stumbling blocks that you need to know before making any investment decisions.

Here, we list the benefits and drawbacks of investing in REITs in India. 

Benefits of Investing in REITs 

• Diversification: REITs allow investors to diversify their investment portfolio and mitigate risk by investing in various real estate assets.
• Liquidity: REITs are publicly traded, so investors can easily buy and sell shares on a stock exchange, giving them greater liquidity than directly investing in physical real estate.
• Professional management: REITs are managed by experienced teams with expertise in real estate, which can help maximize the assets’ value.
• Passive income: REITs generate income from the rental of their properties, which is distributed to shareholders as dividends and can provide investors with a regular passive income.
• Transparency: REITs must disclose financial information publicly, which can give investors greater transparency than investing in privately held real estate assets.

Drawbacks of Investing in REITs 

• Limited control: As a REIT shareholder, you have limited control over the management and operations of the company.
• Market risk: Because REITs are traded on the stock market, their value can fluctuate with market conditions, resulting in losses for investors if the value of the REIT decreases.
• Interest rate risk: REITs typically have high levels of debt to fund their real estate investments. If interest rates rise, it can increase the REIT’s cost of borrowing and negatively impact its profitability.
• Lack of appreciation potential: REITs typically appreciate less than physical real estate can. A REIT’s value is based on its income-generating potential rather than the appreciation of the underlying real estate assets.
• Dividend taxes: Because REIT dividends are taxed as ordinary income rather than at the lower qualified dividend rate, this can result in a higher tax burden for investors than other income-generating investments.

Summing Up

It is challenging to make specific predictions about the performance of REITs in India. Market forces and economic conditions can affect their performance like any other investment. 

However, it is worth reaffirming that the Indian REIT market is still in its infancy and has excellent growth potential. Additionally, the development of the Indian economy and the increasing demand for real estate, particularly in the commercial and office sectors, provide opportunities for REITs in the country.

Through Real estate investment trusts (REITs), small investors can earn income from sizeable real estate holdings with the added benefits of small investment sizes, rental income stability, asset diversification, tax efficiency, and regular returns. In addition, there is greater ease of entry and exit, with the advantage of professional management under a solid regulatory framework. 

If you do your research well, in addition to the potential returns, REITs offer a convenient and efficient way to diversify your investment portfolios and access the real estate market. If you do your research well, in addition to the potential returns, REITs offer a convenient and efficient way to diversify your investment portfolios in the real estate market.