REAL ESTATE INVESTMENT TRUST
REITs or Real Estate Investment Trusts are companies that own, operate, manage or finance income-generating estates. Modeled after mutual funds, they pool the capital of numerous investors. The property purchased is leased and the rental income is distributed as dividends.
Ever since the initiation of the economic reforms in India in the early 1990s, the housing and real estate sector in India has been growing at a fast pace. The added significance of this sector has resulted in more business opportunities arising from escalated demands for commercial and residential space. In spite of this, the housing and real estate sector in India is still in its primary stage and there is enormous growth potential. Thus, the scope for specialized trusts like REIT is quite high in India. As per a recent estimate, a similar investment in developed countries would provide a return of 3 to 4 percent whereas it fetches 12 to 15 percent in India. The realty sector in India has attained newer heights and has become a potential avenue for the investment of not only huge funds but also for individuals who wish to invest as little as 400Rs per month.
REIT opens many doors for its investors. It is SEBI (Securities Exchange Board of India) regulated and hence is a highly secure option. According to SEBI guidelines, REITs are supposed to distribute 90% of the cash inflows as dividends, thus promising a stable income. Another attractive feature of REIT is that the investors are given fractional ownership of the property, giving them the benefit of capital appreciation as well. Investors are free from the hassle since all the taxation, paper and legal work is taken care of by the trusts themselves. The real estate market in India is quite opaque but SEBI is actively trying to improve. REITs have to mandatorily invest 80% of the sum in commercial estate, which has proven to yield a higher rental income. Just like mutual funds, REITs are highly liquid, making them a must for investors.
REITs are listed and traded on the stock exchanges, making it easy to purchase REIT units as long the investor possesses a Demat account. The prices of such units are influenced by their demand in the stock exchanges and their performance. Currently, in India, there are three options for REITs- Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate REIT. Since the launch of REITs in 2019, they have paved the way for their retail investors to participate in the commercial real estate sector. Over time, they have emerged as one of the most viable investment alternatives and have outperformed the BSE Sensex, the realty Index, and a majority of small, mid, and large-cap funds. Despite the pandemic, neither the Embassy Office Parks REIT nor the Mindspace Business Parks REIT has traded below their issue price.
REITs are not as appealing as they look. The laws related to real estate are very weak in India, which makes it a lot riskier than it is. On top of that, estate companies usually operate on high debts, which makes them unpleasing to long-term investors. Another thing that bothers investors is the high commission rate charged by managers. These rates are charged 2 to 3% upfront which consumes a large portion of the income generated.
