The real estate sector is one of the most globally recognized and popular sectors in terms of investment. The first REIT was listed on the Indian stock exchange on April 1, 2019. and since then they have gained high popularity among investors due to their potential for regular dividend income and long-term capital appreciation. In this blog, we will discuss what is reits in india, how to invest in them, and other aspects.
“Landlords grow rich in their sleep.” – John Stuart Mill, Economist
List of contents
- What is reits in india?
- Types of reits in india
- REITs are subject to major rules
- How to invest in reits in india
- Available reits in India to invest
- Pros of reits investing
- Cons of reits investing
- Conclusion
What is reits in india?
These are the types of investment options that allow individuals to invest in real estate without actually owning physical property. They invest in income-generating real estate assets such as rental properties, commercial buildings, etc.
They allow investors to earn income from rentals and benefit from property value appreciation. The company later distributes the collected rent among shareholders as income and dividends
Types of reits in india
They come in a variety of types, each with its own characteristics and investment goal. here are some major types:
- Equity REITs: These are among the most popular types, as they primarily invest in income-generating commercial properties such as office buildings, apartments, and hotels. In this type, they generate revenue primarily from rent and capital appreciation, making them a lucrative option for investors.
- Mortgage REITs: As the name suggests, these are a unique type of REIT that invests in real estate debt, including mortgages and other types of real estate debt. They invest in mortgages and other types of real estate debt. They generate revenue from the interest earned on these loans, which is then shared among investors.
- Hybrid REITs: These combine both equity and mortgage investments in their portfolio. They generate income from both rental income and interest earned on real estate loans. Investing of this type allows investors to diversify and earn from both sources.
REITs are subjected to major rules
In India, Real Estate Investment Trusts are governed by the Securities and Exchange Board of India (SEBI) and the REIT Regulations, 2014. Here are some of the major rules to which REITs are subject.
- Listing: A REIT has to be mandatorily listed on a recognized stock exchange in India.
- Investment Limits: They must primarily invest at least 80% of their assets in completed and income-generating real estate assets, such as commercial properties that guarantee revenues. The remaining 20% can be invested in other assets such as cash, stocks, bonds, government securities, money market instruments, etc., but not more than 10% of the total investment should be made in real estate under-construction properties.
- Minimum asset value: They must have an asset base of at least INR 500 crore.
- Income Distribution: They must distribute at least 90% of their net distributable income to their unit holders as dividends. This ensures that investors receive a regular income.
- Net Asset Value: Net Asset Value must be updated twice in every financial year.
How to invest in reits in india
Here are four common ways to invest in Real Estate Investment Trusts
- Direct Investment: They are listed and traded on the stock exchanges, and as a result, you can invest directly by buying REIT shares through a registered stockbroker. This is mandatory and requires opening a Demat account, choosing a REIT, and placing an order to buy REIT units. Similar to stocks, REIT prices also fluctuate based on the demand, supply and performance of the REIT. This is a simple and easy way to invest in it.
To open zerodha account :- Click here
- Mutual Fund Investment: It’s an indirect investment method. There are many mutual funds in India that invest in REITs. Mutual funds provide investors with an easy and convenient way to invest in them, as professional and expert fund managers select and manage REITs for them. However, this may involve higher management fees compared to direct investment in REITs.
- Exchange-Traded Funds (ETFs): ETFs are passive investment funds that track the performance of a benchmark index. Some ETFs in India track the performance of REITs. Through these ETFs, you can gain indirect exposure to REITs. This is a low-cost and convenient way to invest in them, as ETFs have lower management fees compared to mutual funds.
- Initial Public Offerings (IPOs): When a new REIT is launched, it may offer its shares to the public through an IPO. Investors can participate in the IPO and purchase the units directly from the REITs. Investing in the primary market is a good option for investors who want to invest in a REIT at an early stage.
Available reits in india to invest
At present, there are only 3 REITs listed in India – Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust (Birect).
Dividend performance of REITs shares after listing on the NSE
| REITs | 2020 | 2021 | 2022 | Till feb2023 |
|---|---|---|---|---|
| Embassy reit | 5.5 | 21.45 | 21.25 | 5.31 |
| Mindspace reit | - | 18.79 | 18.74 | 4.80 |
| Birect reit | - | 12 | 20.30 | 5 |
Pros of reits investing
They offer various advantages to investors. Here are some of the key advantages
- Diversification: Investing in REITs can be a smart way to diversify your portfolio, as they provide exposure to the real estate market without the burden of owning and managing physical properties. They invest in a diversified portfolio of real estate assets, which helps investors reduce risk.
- Regular Income: For REITs, rent is a primary source of income, and they distribute at least 90% of their net distributable income to their investors as dividends. As a result, this passive income source is generated from the rental income earned by the underlying real estate assets held by the them.
- Capital Appreciation: The value of the real estate assets held by them can appreciate, providing investors with an opportunity for capital gains. This makes investing in REITs a potentially lucrative choice for those looking to grow their wealth through real estate.
- Liquidity: They are traded on stock exchanges, simplifying share buying and selling for investors. As a result, investors are able to adjust their portfolio as needed and sell their investments when they need to.
- Expert Management: Experienced professionals with specialized knowledge and expertise in real estate investment and management handle the management of these.
- Low Investment: Direct investment in real estate is generally expensive, whereas REITs require comparatively low capital. This low entry barrier allows small investors to participate in the real estate market.
Cons of reits investing
There are also some disadvantages that investors should be aware of before making an investment decision. Here are some of the key disadvantages:
- Market Risk: Fluctuations in the real estate market, including factors like volatility in real estate prices and changes in interest rates, directly impact the performance of REITs.
- Tax Benefit: They provide no tax benefit. Tax is charged on the entire dividend income earned from it.
- Limited Investment Options: At present, the stock exchange lists only 3 REITs, limiting investors’ investment choices.
- Fees and Expenses: They charge management fees and other expenses, which can reduce the overall income and returns generated by them.
Conclusion
In this blog we have cover what is reits in india. Real Estate Investment Trusts have emerged as an excellent option for small investors who find investing in real estate beyond their capacity. It allows investors to enjoy the rental income in the form of a dividend. It provided lucrative and attractive annual returns through dividend income.
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