Overview Of REITs: And Its Benefits 

Did you know you can invest in properties that are not even conceivable in your investment portfolio and require crores to invest? You might think, how? Before answering your question, I would like to share an instance with you.

One of my friends used to invest in stocks, mutual funds, etc. However, he started making losses in stocks after some time, and in mutual funds, he did not have access to his funds for a long time. Even though returns were not guaranteed, as “mutual funds are subject to market risk,” he was frustrated.

One day, he shared his problem with me. I asked him, why doesn’t he invest in real estate, as it is much safer than other investment options? Even in rare cases where it dips, his asset would be physically available and usable.

He told me he did not have a substantial amount of money to invest in real estate. Then I told him that he could invest indirectly in real estate with a small investment, even if he didn’t have a large initial investment. He asked me curiously, how? And I introduced him to the term called “REITs.” Today, I will share with you what I shared with my friend and how it changed his investment journey and profits.

REITs History In Brief

Real Estate Investment Trusts (REITs) started in the U.S. in 1960 when President Eisenhower allowed investments in big real estate projects. The first REIT was created in 1961. In 1986, laws changed to let REITs manage properties. Now, about 40 countries have REITs, helping people invest in real estate easily.

Reits History In India

Real Estate Investment Trusts (REITs) in India started in 2007 when SEBI introduced the idea. In 2014, rules were set to guide how they operate. The first REIT, Embassy Office Parks, launched in March 2019. Since then, more REITs have become popular, offering a way for people to invest in real estate without owning properties.

Types Of REITs In India

There are several types of REITs, each with its own focus and investment approach.

Equity REITs:  These are the most common type, and they focus on buying and managing income-producing commercial properties, like shopping malls and office buildings. Their main source of income comes from rent collected from tenants.

Mortgage REITs: or mREITs. Instead of owning properties, these REITs lend money to property owners or invest in mortgage-backed securities. They earn money from the interest on the loans they provide, which can be a steady income source.

Hybrid REITs:  These REITs combine both equity and mortgage investments. This means they can earn income from both rental payments and interest, allowing for a more diversified investment approach.

Private REITs: are different because they only accept investments from a limited number of select investors. These trusts aren’t listed on public stock exchanges and aren’t regulated by the Securities and Exchange Board of India (SEBI), making them less accessible to the average person.

Publicly Traded REITs: are available to anyone. Their shares are listed on national stock exchanges and are regulated by SEBI, meaning you can easily buy and sell them just like regular stocks.

Public Non-Traded REITs: These are registered with SEBI but are not listed on stock exchanges. They tend to be less liquid, meaning it’s harder to sell your shares quickly. However, they can be more stable because they aren’t affected by the ups and downs of the stock market.

Now let’s answer your how.
 

How does a real estate REIT work?

The full form of REIT is Real Estate Investment Trust. Just from the full form, you can understand its characteristics. REITs are like mutual funds where you invest a small amount of money every month or whatever amount you want to invest, and then that investment trust invests that money in real estate, mostly in commercial real estate, from which they earn returns and share them among the investors.

You can invest in REITs with even 100 rupees. By investing 100 rupees, when the dividend is distributed, you will receive profit proportional to that 100 rupees. So, it depends on you; the more you invest, the more you earn.

REITs Performance In India

Real Estate Investment Trusts (REITs) in India are a way for people to invest in real estate without having to buy properties themselves. Over the years, these investments have usually provided returns of about 8 to 10% each year from rental income, along with an average increase in value of around 5% per year.

The returns can vary depending on the type of property. For residential properties, investors can expect returns of about 8% each year. On the other hand, premium commercial properties, like office buildings and shopping malls, can give higher returns of 10 to 12% each year.

Some specific REITs have done particularly well. For instance, Embassy REIT has returned an impressive 10.4% per year since it started in 2019. Mindspace REIT has also performed well, returning over 10% since its launch. Nexus Select Trust even delivered a remarkable 32% return over the past year.

Are real estate REITs a good investment?

REITs are great investment option to invest directly in real estate without large capital and earn great returns over the period of time, but everything has advantages and disadvantages, so as REITs, lets understand its advantages and disadvantages:

Advantages of Investing in REITs:

       •  Adds real estate to your portfolio without buying properties.
       •  Easier to buy and sell on stock exchanges.
       •  Regular dividends from taxable income.
       •  Managed by experts who handle property operations.
       •  Open to smaller investors without large capital.

Disadvantages of Investing in REITs:

       • Subject to stock market fluctuations.
       • Rising rates can impact property values and borrowing costs.
       • Different REIT types face unique challenges.
       • High fees can eat into your returns.

How do beginners invest in REITs?

Investing in Real Estate Investment Trusts (REITs) is a great way for beginners to get into real estate without buying properties directly. Here’s how to start:

Choose Your REIT Type

There are three main types:

       •  Equity REITs: Own and manage properties.
       •  Mortgage REITs: Lend money for real estate.
       •  Hybrid REITs: Combine both strategies.

Decide, Where to Invest?

You can invest in:

       •  Publicly Traded REITs: Bought and sold like stocks.
       •  NonTraded REITs: Less liquid but may offer better returns.
       •  Choose an easytouse platform with low fees. 
       •  Look at property types, financial health, and management.
       •  Mix different REITs or assets to reduce risk.
       •  Keep track of your investments and consider reinvesting dividends for growth. 
       •  With these steps, you can build a strong investment foundation!

How is REIT returns calculated? 

Let’s understand the calculation of REIT’s returns with this simple infographic.

How To Qualify As A Real Estate Investment Trust (Reit) In India?

To qualify as a Real Estate Investment Trust (REIT), a company must meet the following requirements:

        •  Must be set up as a business trust or a corporation.
        •  Shares must be fully transferable, allowing anyone to buy and sell them freely.
        •  Managed by a team of trustees or a board of directors.
        •  At least 100 shareholders are required.
        •  No more than five individuals can own 50% or more of the shares during any tax year.
        •  Must pay at least 90% of taxable income as dividends to shareholders.
        •  At least 75% of gross income must come from mortgage interest or rents.
        •  No more than 20% of the company’s assets can be in stocks of taxable REIT subsidiaries.
        •  At least 75% of investment assets must be in real estate.
        •  A minimum of 95% of total income should be invested. 

Conclusion

Real Estate Investment Trusts are a great way to invest your money indirectly and securely in real estate, even without a high initial investment. Investing in REITs is still not a predominant practice in India, but the growing number of REITs signifies its growth and potential. It’s a great way to secure a good return with low investment.