Real Estate Investment Trust(REIT): Meaning, Types & Limitations

Would you like to consider investing in a portfolio of high-quality commercial properties with just a few clicks, without the need for large capital or property management headaches? REITs offer a seamless and accessible way to invest in the booming real estate market, making it easier than ever to grow your wealth. Let's explore how in this blog.

What is real estate investment trust (REIT)?

REITs or real estate investment trusts stand for a company that owns and operates real estate to generate income. Real estate investment trust companies are typically corporations that manage portfolios of high-value real estate properties and mortgages. As a case in point, they lease properties and collect rent frequently. The rent thus collected is later distributed among shareholders as income and dividends.

Typically, REITs offer investors an occasion to possess high-priced real estate and enable them to earn dividend income to increase their capital eventually. This way, investors can utilise the opportunity to appreciate their capital and generate income at the same time.

Both big and small investors can park their funds into this investment option and reap benefits accordingly. Small investors may attempt to pool their resources along with other investors and invest the same into large commercial real estate projects. Properties included in REITs comprise data centres, infrastructure, healthcare units, apartment complexes, etc.

What are the types of REITs?

The types of Real Estate Investment Trusts (REITs) can be classified as:

1. Based on the Nature of the Real Estate Asset

Under this REITs there are 3 categories:

• Equity REITs: Equity REITs own and work on income-producing properties like healthcare infrastructure, warehouses, offices, etc. The core earning revenue is the rent generated from the real estate assets. As per NAREIT (National Association of Real Estate Investment Trusts), the estimated value of the US equity REIT market was $3.9 trillion as of Q1 2024.
• Mortgage REITs: These REITs cover loans and finance to the owner of the real estate properties and function through mortgages and the acquisition of the mortgaged securities. Their earning is a net interest income (the difference between the interest charged and the cost of funding) from mortgage loans.
• Hybrid REITs: Hybrid REITs are a combination of both equity and mortgage REITs as they own properties as well as hold mortgages.

2. Based on the Nature of Trading

There are three types of REITs under this head:

• Publicly Traded REITs: REITs are registered with the SEC and publicly Traded REITs are listed on public stock exchanges, and their shares can be easily transferable by the public during trading hours on major stock exchanges like the NYSE. The share’s price however is set by the dynamics of supply and demand in the market and by the performance of the fundamental real estate assets.
• Public non-traded REITs: The shares of these REITs are not registered with public stock exchanges, and so cannot be traded on a stock exchange. The shares are usually sold to individual investors through brokers.
• Private REITs: Private REITs are also not registered with public stock exchanges, rather the shares are allotted through private placements to institutional investors and high-net-worth individuals.

What are the top REITs in India?

Currently, the Indian REIT market is relatively new, with only a few REITs listed. However, they have gained popularity, and more options are expected to enter the market soon. Here are top few REITs in India:

1. Embassy Office Parks REIT: India's first publicly listed REIT, owning a large portfolio of office spaces across major cities.
2. Mindspace Business Parks REIT: Focuses on commercial properties in top cities like Mumbai, Hyderabad, Pune, and Chennai.
3. Brookfield India Real Estate Trust REIT: Primarily invests in commercial office spaces across major business hubs, including Gurugram, Mumbai, and Kolkata.
4. India Grid Trust (IndiGrid): This is an Infrastructure Investment Trust (InvIT) focused on power transmission assets but operates similarly to REITs.
5. PowerGrid Infrastructure Investment Trust (PGInvIT): Another InvIT, focuses on energy transmission infrastructure but offers similar benefits to REIT investors.

What is REIT investing?

REIT investing involves purchasing shares in a Real Estate Investment Trust (REIT) company that owns, operates, or finances income-generating real estate. Here’s a brief outline:

• Structure: REITs collect capital from multiple investors to acquire, manage, and develop real estate assets such as office buildings, shopping malls, apartment complexes, or industrial properties.
• Income: REITs normally earn income through rent collected from tenants or interest from real estate-related loans. They dispense most of their income to shareholders in the form of dividends, making them attractive for income-seeking investors.
• Liquidity: Publicly traded REITs are listed on stock exchanges, allowing investors to transact shares like any other stock, providing liquidity and ease of access.
• Diversification: By investing in REITs, individuals can increase exposure to a diversified collection of real estate assets without any hassles of having to directly buy or manage properties themselves.
• Tax Benefits: In many authorities, REITs benefit from tax advantages, such as exemption from corporate income tax, provided they distribute an important portion of their income to shareholders.

REIT investing lets individuals participate in the real estate market and benefit from its potential returns without the complications of direct property ownership.

How to invest in REITs in India?

Real Estate Investment Trusts (REITs) offer a smart way to invest in income-producing properties and benefit from the real estate market’s growth without the hassle of property management or heavy down payments.

Step 1: Explore Your Options: REITs come in a variety of types, each specifying a detailed type of real estate as we discussed above in the Types of Real Estate Investment Trust (REIT) section.

Step 2: Choose Your Investment Vehicle. There are three main ways to invest in REITs:

• Individual REIT Stocks: This allows you to target specific properties and potentially earn higher returns, but requires more research and carries more risk.
• REIT Mutual Funds: These pool your money with other investors to buy shares in a basket of REITs. This offers immediate diversification and reduces risk.
• REIT ETFs: REIT ETFs (Exchange-Traded Funds) are the same as REIT mutual funds, but trade throughout the day like stocks, offering more flexibility.

Step 3: Open an Investment Account: To buy REITs, you will need an account with a reputable online brokerage firm or investment account. Opening an account is usually a quick and easy process.

Step 4: Conduct Your Research Before you invest, investigate the world of REITs. Here are some key factors to consider:

• The REIT’s Track Record: Look up their financial performance, dividend history, and property portfolio.

• Fees and Expenses: Understand the fees associated with your chosen investment vehicle (e.g., expense ratio for REIT mutual funds/ETFs).

• Market Conditions: Consider the overall economic climate and how it might affect different types of REITs.

Step 5: Diversify and Monitor: Diversification can help in mitigating risk. Invest in a variety of REITs across different sectors. Lastly, regularly monitor your investments and adjust your strategy as needed.

What are the Limitations of REITs?

The limitations of REITs include:

1. Market Risk: The value of REITs can fluctuate based on changes in the real estate market and other economic factors.
2. Interest Rate Sensitivity: REITs are sensitive to interest rate changes, and rising interest rates can reduce the value of REITs.
3. Limited Control: Investors in REITs have limited control over the management of the fundamental properties and may not have a say in how the properties are operated.
4. Management Fees: REITs charge management fees, which can reduce the overall returns for investors.
5. Concentration Risk: Some REITs may be heavily invested in a particular geographic region or property type, which can increase the risk of the portfolio if there are issues in that region or type of property.

Conclusion

Real Estate Investment Trusts India offers a unique opportunity for investors to access the real estate market without the challenges of direct property ownership. With various types of REITs catering to different sectors, they provide diversification, steady income, and liquidity. However, like any investment, REITs come with limitations such as market volatility and regulatory risks. Understanding how to invest and weighing the advantages and limitations is crucial for making informed decisions in this growing sector.

FAQs

Q1. How does REIT work in India?

Ans. A REIT is usually set up in the form of a trust registered with the Securities and Exchange Board of India (SEBI). The sponsor or the investor who makes the trust transfers ownership of the properties to the REIT in exchange for units.

Q2. How often do REITs pay dividends in India?

Ans. Generally, REITs are a good source of income, whether that is monthly (less common) or quarterly. REITs are required by law to pay 90% of taxable income to the shareholders. The REIT sector has a large collection of various types of companies.

Q3. What is the holding period of a REIT?

Ans. Under the new proposal, investments in REITs will be considered long-term if investors hold the units for more than 12 months, instead of the previous 36 months.

Q4. What is the 80/20 rule for REITs?

Ans. At least 80% of a REIT's asset value must be in completed and income-generating real estate, with the remaining 20% able to be invested in riskier assets such as under-construction buildings, equity shares, bonds, cash, or under-construction commercial property.