There is no doubt that the introduction of ground-breaking regulations like the GST tax structure and RERA has significantly impacted the Indian real estate industry. Along with these, a new concept called Real Estate Investment Trusts (REIT) has emerged which has the ability to streamline the real estate industry by making it more organised, progressive and accountable. Here’s all you need to know about it.
What is REIT?
Real estate Investment Trusts are investment platforms that manage a diverse range of profitable real estate properties. These properties can be either commercial or residential in nature. The functioning of REIT is similar to that of a mutual fund. In mutual funds, investors can choose from a wide range of stocks, whereas in REITs, individuals can invest in several properties to build a profitable real estate portfolio. What is unique about Real Estate Investment Trusts is that it is a platform suitable for all types of investors. They are specifically beneficial for investors with smaller budgets who are looking to make a valuable investment in the Indian real estate industry.
How REITs work?
Ideally, the properties owned by REITs are either rented or leased out. Just like how mutual fund investors enjoy returns, individuals who have invested in REITs can also benefit from their share of the real estate investment. The value of their investment returns largely depends upon the percentage of shares that they own. REITs are registered with the Securities and Exchange Board of India and typically work like a trust. There are three main individuals who play a key role in the functioning of REITs.
- Sponsor: The individual who invests money in the REIT.
- Trustee: The individual who monitors the overall functioning of the REIT and is also a representative of the unit holder.
- Fund manager: A company or a corporate body which acts as the authority for making key investment decisions.
Types of REITs in India
Equity REITs: REITs which own and operate income-generating properties are called equity REITs. Ideally, equity REITs lease out their properties, such as residential complexes and commercial spaces, to tenants. The income earned is then divided among the investors in the form of dividend shares.
Mortgage REITs: These are agencies that lend money in the form of debts for real estate developments. In this case, dividends are shared among the investors using the income generated in the form of EMIs.
Why you should invest in REIT?
The greatest advantage of an REIT is that it has opened up the real estate avenue to a much larger section of the population. It is indeed a viable investment option for those home buyers who are interested in affordable housing. Here a few other benefits of investing in REITs:
Unlike other investments, REITs are quite predictable. Real estate assets offer greater predictability in the form of appreciation rates and rental income. Hence, the returns from such a kind of investment can be easily predicted with higher accuracy and consistency.
Even though real estate is considered to be a stable investment option, REITs offer better accessibility for real estate investors. The biggest advantage is that most of the REITs own a diverse portfolio of properties with a wider tenant pool. Instead of relying on the returns of a single property, investors can enjoy the dividend shares from a pool of properties. This, in turn, helps in minimising the risks of investment.
Liquidity of properties
With the advent of Real Estate Investment Trusts, purchase and sale of real estate investment can be done instantaneously. Since the investors are buying real estate stocks rather than actual properties, the process of converting your assets into liquid cash becomes very easy and hassle-free.
Steady income generation
It is mandatory for all the REITs to distribute up to 90% of their income produced in the form of rents with its investors. The dividend shares from the REIT investment ensures a steady income for all the investors. Unlike other forms of investment, dividend shares from REITs are more reliable due to the stable nature of the rental income.
Another great advantage of investing in REIT is that it is a firm which is managed by investment experts. This makes the entire process flexible. The key fund management decisions are taken by the experts after taking into consideration the market conditions of the real estate industry.
The introduction of REIT has definitely made the fast-paced real estate industry of India more transparent and reliable. The national GDP will witness a significant increase when more individuals start investing in REITs.