- Real Estate Investment Trusts (REITs) are in the news, with analysts bullish about the potential in India and the Securities and Exchange Board of India looking to tweak norms – a process that will begin as early as next week including circulation of a consultation paper to amend the regulations of 2014, to encourage investments. Here is a ready-reckoner that will help in understanding what an REIT is, how it works, and the potential investment risks:
What are REITs?
- REITs are similar to mutual funds. While mutual funds provide for an opportunity to invest in equity stocks, REITs allow one to invest in income-generating real estate assets.
How does an REIT work?
- REITs raise funds from a large number of investors and directly invest that sum in income-generating real estate properties (which could be offices, residential apartments, shopping centres, hotels and warehouses).
- The trusts are listed in stock exchanges so that investors can buy units in the trust. REITs are structured as trusts. Thus, the assets of an REIT are held by an independent trustee on behalf of unit holders.
- The investment objective of REITs is to provide unit holders with dividends, usually generated from rental income and capital gains from the profitable sale of real estate assets.
- Typically, the trust distributes 90 per cent of its income among its investors by issuing dividends.
- REITs originated in the U.S. to give investors an opportunity to invest in income-generating real estate assets. After its introduction in the U.S., several countries such as Singapore, Australia and Hong Kong have implemented REITs.
Why now, in India?
- REITs, as a concept, have been on the horizon for a while now.
- India’sregulations in 2014 for the sector have not been able to attract investor interest. REITs obtained exemption from dividend distribution tax in the Budget, a step towards making them attractive for the investors.
- A report by real estate consultancy firm Cushman and Wakefield estimates that Indian commercial real estate (like office, retail assets) offers investment opportunities for REITs worth $43 billion – $54 billion (Rs, 2.88 lakh crore – Rs. 3.60 lakh crore) across top cities.
- The underlying strategy for REIT is to invest in rent-yielding assets and generate rental income for investors in the form of dividends. That explains why commercial real estate is seen as potential for REITs. The predominant strategy to invest in residential assets is via rental housing schemes. However, rental housing schemes in India are still not prevalent and hence investing in residential assets would be challenging
- The current SEBI guidelines for REITs permit investments only in rent-yielding assets.
Why invest in REITs?
- For investors who are averse to investing in physical purchase of property due to the risks involved, REIT is an alternative. Investors purchase units of REITs which are traded on the stock exchange, as against physical purchase of property. Therefore, investors can buy and sell units of REIT on the stock exchange as and when required, making investment easier to liquidate compared to physical property transaction.
- REITs units are listed on, and are subject to the vagaries of the stock exchanges, resulting in negative or lower returns than expected.
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