Real Estate Investment Trusts (REITs) are becoming one of the most promising investments for people interested in investing in the real estate industry without actually owning property. Rising prices of commercial properties in India are forcing investors to search for a more accessible investment opportunity within the industry.
A REIT gathers investments from investors and uses them to invest in commercially viable properties such as offices, malls, hotels, warehouses, hospitals, and other residential rental projects. The profit generated from rentals and appreciation in value of these properties is shared among the investors in the form of dividends.
Around the world, REITs have become an important asset class since being introduced in the US in 1960. REITs are now valued at trillions of dollars in countries like Singapore, Japan, UK, and Germany. SEBI has framed regulatory guidelines for setting up REITs in India in 2008, but the first REIT listing took place in 2019.
Embassy Office Parks REIT became the first REIT to be listed in India with a raised fund of ₹4,750 crore from its IPO. Other REITs include Mindspace Business Parks REIT and Brookfield India Real Estate Trust. According to experts, the total value of REITable commercial assets in India is close to $50 – 60 billion. There are many reasons why REITs have attracted many investors to make investments in this category. Investors can invest in REITs through stock exchanges with comparatively lower investments. Moreover, there is better liquidity in REITs than any other real estate investment due to easier buying and selling.
There are mainly three major types of REITs:
- Equity REITs : Invest directly in income-generating properties such as offices, malls, hotels, and warehouses. They mainly earn revenue through rental income.
- Mortgage REITs (mREITs): Invest in property loans and mortgages instead of physical properties. Their income mainly comes from interest payments.
- Hybrid REITs: Combine both property ownership and mortgage investments, helping investors earn returns from both rent and interest income.
One of the main reasons why people prefer REITs over any other investment is the fact that it pays regular dividends. Being rent generating assets, the returns are shared among investors in the form of dividend income. Currently, Indian REITs are paying dividends yield of about 6 – 8% per annum. However, it must be noted that like any other real estate investment, REITs do carry certain risks for the investors as well. For instance, the rental income can be affected due to factors like increasing interest rate or vacancy in office spaces or lower demand for such properties. The dividend received from a REIT will be taxed according to the investor’s income tax slab.
What makes REITs a popular choice among many is the fact that it enables individual investors to generate rental income without owning and managing property themselves. They can generate rental income by simply buying REIT units and enjoying returns in terms of rents paid by big corporations. As more commercial real estate properties are coming into existence in India, more REITs are expected to list in the coming future.
