What is REIT(Real Estate Investment Trust)? Should you Invest in It?

What is REIT(Real Estate Investment Trust)?

REIT works as mutual funds for stocks in which a firm takes money from investors and from that money they buy real estate properties and manages investors' money. REITs buy properties and lease the properties and collect the rent. Collected rent is distributed among shareholders as dividends. All the small and big investors can buy REITs. The minimum investment amount in REITs is ₹50,000(approx), the amount may vary from REIT to REIT. REITs have also divided their assets into parts called units similar to mutual funds. Properties bought by REITs can be any segment healthcare, apartments, etc. REITs give investors to be part of highly valued real estate properties. Rates of properties are extensively high in cities like Hyderabad, Mumbai, Delhi, etc. these cities being expensive get out of reach of common people so REITs help common investors excess to these properties and become a part of it and take advantage of the growth of real estate in this cities/areas. In September 2016 SEBI(Securities Exchange Board of India) notified REITs (Real Estate Investment Trust) regulations, thereby giving a green signal for REITs in India. In March 2019, IPO of Embassy Office Parks, a Bengaluru-based real estate developer and backed by global investment firm Blackstone. On 27 July 2nd REITs of India Mindspace Business Parks REIT launched its IPO.

Why invest in REITs?

REITs are less capital intensive compared to the direct investment in real estate as it is more capital intensive but REITs being divided into shares makes it less capital intensive. REITs being less capital intensive makes it simple for common investors to invest in them. REITs are listed on stock exchanges therefore all the important details are available on the website of REITs. REITs generate most of its income in the form of lease(rent) so it needs to pay 90% of its income to shareholders in the form of dividends even income from REITs are tax-free. Investments in REITs are so easy, it's just as easy as buying stocks in a Demat account.

How REITs Investors Make Money?

REITs investors make money through dividends and as stocks of these REITs are listed on BSE  and NSE any rise in the stocks will also make money. 

How REITs Make Money For Themselves?

REITs make money through lease income as they work like mutual funds so the same as mutual funds take a fee for the management of assets.

Types of Real Estate Investment Trust (REIT)

There are three main types of REITs in India 1) Equity REITs, 2)Mortage REITs & 3) Hybrid REITs

1) Equity REITs

They buy real estate properties and lease them to companies or individuals. The income from the lease of properties is distributed among shareholders as dividends.

2)Mortage REITs 

Here REITs finance the builder for the property or in short give loans to the builders and they earn EMIs on this loan. And this income is distributed among shareholders in the form of dividends.

3) Hybrid REITs

REITs invest in both Hybrid and Equity.

Advantages/Disadvantages of REITs

REITs are not capital intensive.

It gives diversification to the real estate portfolio.

It's easy as it's as simple as buying stocks and you can even get free from the mess of papers of buying direct real estate.

Regulated by SEBI so chances of fraud get minimal.

No mess of finding a person for lease, as all work is done by REITs, REITs offer high dividends.

Dividends from REITs are tax-free in India.

All the information about REITs is there on their websites and every decision are disclosed to SEBI and exchanges.

Disadvantages

You cannot decide what to buy and what not to buy, all the operational decisions are taken by REITs.(This can be an advantage also and a disadvantage also)

How to Invest in Real Estate Investment Trusts?

Investing in REITs is as simple as buying stocks. Follow the steps given below:

Step 1: Open a Demat account with any Indian stockbroker(I prefer Zerodha which is India's No.1 Stock Broker. Click the link to open an account in Zerodha: Zerodha).

Step 2: Then add funds for the purchase of REITs.

Step 3: The search for the REIT you want to buy.

Step 4: Add the quantity you want to Buy.

Step 5: Click on Buy.

(Note: REITs are traded in lots).

Eligibility of REITs

For a company to be recognized as REITs it needs to satisfy the following criteria:

1)The asset base of the company should be more than ₹500 crores.

2) 80% of investments to be made in properties that are capable of generating income or revenue.

3) Only 10% of the investment must be in real estate under construction.

4) In the form of dividends, 90% of the income to be distributed among shareholders.

5) Twice a year NAVs(Net Asset Value) should be updated in the Financial Year.

How many REITs are there in India?

Currently, there are two REITs in India.  Embassy Office Parks, a Bengaluru-based real estate developer and backed by global investment firm Blackstone and Mindspace, backed by private equity firm Blackstone and K Raheja.

Future Of REITs India 

India cheerfully welcomed Embassy REITs in March 2019. In the next 2-3, we can see some of the huge giants coming with their IPOs and raising billions. Indian being a developing country there is a lot scope of growth in Indian Real Estate markets and taking part in this growth REITs can be a good option.