What is Real Estate Investment Trust (REITs)?

Dear friends, a few years ago, if you had asked me the question about investment in real estate with a small amount, I would have said 'No', it takes a few lakhs to buy a piece of land. And if you want to invest in real estate in a Metro City, like Mumbai, it would easily cost you at least Rs 50-60 lakh. And when it comes to commercial real estate, a normal retail investor can't even think about investing. But today, there are a few options for retail investors to invest in real estate, and not just in any real estate an option to invest in one of the hottest commercial real estate of India as well as across the world. And the best part is that you don't need a few crores for that. In fact, what if, I tell you that you can invest in a top commercial property in Bangalore, Mumbai, Delhi, and Pune for under Rs 500? It sounds crazy, isn't it? In fact, you can even invest in some of the top commercial properties of the world, including Singapore, Australia, and the US with as low as Rs 5000, don't believe me? That I'm sure you will believe me by the end of this article. The answer is REIT investment. Why some of you might have heard about REIT. I am sure many of you would be alien to this concept, as this is a relatively new way of investment, especially in India. Although REITs are quite popular in developed countries like the US. In this article, we will explore more about REIT investment, that what is REIT investment? How does it work? Type of REIT. How to invest in REIT?  Risk versus Return. Pros and Cons. All right, let's get started.

What is Real Estate Investment Trust (REITs)?
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What is REIT Investment

Think this way. Many people in India like to invest in commercial and real estate property for investment purposes, as well as a source of regular income. While commercial properties are more attractive with high rental yields. They are way too costly for an individual retail investor. Hence retail investors end up investing in residential properties. But investment in real estate is not a cup of tea for many investors, as it requires a lot of money. So basically, the biggest bottleneck for investment real estate is "Money". And that's where some smart guys thought of pulling money from various investors and investing in real estate. And the best part is that retail investors do not have to take any headaches off maintaining the property. REIT stands for Real Estate Investment Trust, which is a company that owns and manages income-generating real estate; Mind you, these estates are income-generating assets, where REIT owner would rent out commercial buildings and generate income. These REITs allow investors to invest their money in commercial properties and generate income. This income is in the form of dividends, and appreciation in the value of the stock. These REITs are traded like stocks, we will discuss that later. What could be the various type of real estate-based REITs? For example, it could be tech parks or a data center or a healthcare unit or commercial complex, etc. There is also a concept called InviT (Infrastructure Investment Trust) that invests money in infrastructure assets, like roads, power plants, transmission lines, pipelines, etc. Now let us first try to understand how exactly it works. 


How do REITs work?

The process of REIT investment is actually similar to mutual funds. Individual retail investors like you and me can make money in the REIT and just like mutual fund houses: these REITs have managers that manage your fund, along with REIT sponsors and the team of trustees. They invest the money in real estate properties and in turn generate rental income as well as price appreciation in the property. This money is eventually passed on to the investor in the form of dividends as well as capital growth. Please note that the R&D investments are income-generating commercial real estate, mainly in the form of rentals and 90% of the income from real estate is paid back to the investor. It means REITs are a good option for a dividend, but the growth prospects are on the low aside.


Type of REITs

There are three basic types of REITs in India...

1. Equity REITs

It is the most popular category of REIT, in equity REIT, the company owns and manages the real estate properties, the revenue is mainly generated in the form of rentals, and income is then distributed among the REIT investors as a dividend.

2. Mortgage REITs

The 2nd category is mortgage REIT. The trust doesn't own or manage the property, it would lend the money to real estate company. So in this case, the major earning would be in the form of interest income on the money landed as a loan.

3. Hybrid REITs

The 3rd category is hybrid REIT which invests in both equity and mortgage REITs.


How to invest in REITs? 

As of now, there are two options to invest in REITs. The first option is directly in a stock-based REIT and the second option is via a mutual fund-based Reit, 

1. Stock-based REITs

In stock-based REITs, REIT is just traded like a stock. Since it is a very new concept in India. Currently, there are only three listed REITs in India. 

(I) Embassy Office Parks REIT

The first Reit that was listed on exchanges was Embassy park REIT, which was launched in April 2019. Embassy park REIT has a portfolio of 8 office parks, 6 hotels, and a 100-megawatt solar power plant. It comprises a 33.8 million square feet completed operating area with an occupancy of 87% as of 31st March 22. Out of this 74% of Real estate is in Bangalore, 10% in Mumbai, and the remaining in NCR and Pune.

(II) Mindspace Business Parks REIT  

The next REIT is Mindspace REIT which is sponsored by Raheja Group. Again diversified it with office space across Mumbai, Pune, Hyderabad, and Chennai. 

(III) Brookfield India REIT 

The third REIT is Brookfield India REIT. So you can invest in these Reits just like a stock investment. And these REITs are currently available at below Rs 500 Just like a stock, but before you invest, you can explore their financials, feature prospects, dividend payouts, etc just like other stocks. 

1. Mutual fund-based REITs

The second option is a mutual fund-based REIT. You remember we discussed that you can invest in a property in Singapore or Australia for as low as Rs 5000; Well, I was talking about this mutual fund-based REIT only, there are currently 3 mutual fund-based REITs.

(I) Kotak International REIT (Fond of Fond)

1st is Kota international REIT (FoF), since it is a fund of funds it invests in multiple REITs just like mutual funds invest in multiple stocks. These REIT funds often invest in multiple Reit with properties in Singapore, Australia, etc. 

(II) PGIM India Global Select Real Estate Securities (FoF)

The 2nd is PGIM India Global Select Real Estate Securities (fund a fund).

(III) Mahindra Manulife Asia Pacific (FoF) 

The 3rd is Mahindra Manulife Asia Pacific (fund a fund).

If you want to invest in a stock-based REIT, you can simply invest in REIT just like a stock from your trading account. Just, search the name Embassy parks REIT or Mindspace REIT, or Brookfield India REIT and you will find the option. Remember that when you invest in these listed REITs, you will have exposure in the real estate of India, and if you want to invest in global real estate, then you can consider REIT-based mutual funds. Again, you can invest in these REIT mutual funds just like any other mutual fund. 


Risk Vs Return 

If you look at risk vs return, first of all, REITs are regulated by SEBI. So it is not, that REIT you invested in could tomorrow pack their bags and disappear. Moreover, there are guidelines on REIT investment that the fund house can't invest in any random property. There is low risk involved in REIT as a minimum of 75% of the assets are invested in revenue-generating projects, that are completed. Having said this, the price of REIT would fluctuate every day just like stocks, and the dividend income would also vary. In terms of return, since the REIT market is at its nascent stage in India, there is not much historical data at this point in time. However, in developed countries like the US, the returns from REITs are somewhere between bonds and stock. In India currently, you can expect a return in the range of 5%-7% in terms of yearly dividend yield, plus around 3%-4% annual capital appreciation over the long term. So it is not that you will generate a huge amount of return out of REIT. But it is another way to diversify your investment via real estate. For example, in FY 22 Embassy Office Parks REIT declared an equity dividend of Rs 21.81 per share, which was equivalent to a 7.27% yield. Likewise, in FY 22 Mindspace declared a dividend of Rs 18.6 per share, resulting in a dividend yield of 6.8%. So like I said, that dividend income would be in the range of 5%-7%, and the stock price is completely linked to market performance.


REITs Pros and Cons

If you look at the pros and cons.

PROS

Diversify your Investment

1st advantage of REIT is that it gives you an option to diversify your investment. So you can diversify your money apart from stocks and mutual funds by investing in real estate. The best part is that you don't have to take the headache of managing the property. Moreover, everything is legit and under the regulation of SEBI. 

Part owner of top Commercial Properties

2nd benefit is, it gives you a chance to be a part owner of top commercial properties around the globe.  REIT investment is not just limited to your area, but you can actually invest in a property in Mumbai, Bangalore, or Singapore while sitting at your home in a small town. 

Regular Dividend based Income 

3rd benefit is regular dividend-based income. REITs also give the opportunity to generate regular dividend-based income.

Very High Liquidity 

4th benefit is very high liquidity, in the case of Real Estate when you try to sell the property, there could be a case where you don't find the buyer at the right price. So, there could be a liquidity constraint if you buy the real estate directly. However, with REIT you have complete liquidity. Since it is traded like a stock, you can sell it anytime.

CONS

Low Growth Prospects

1st disadvantage is low growth prospects since 90% of the income from REIT is paid out as dividends, so the capital appreciation is low. Hence, the growth prospects are also very low. It is more suitable for those looking for dividend income. 

Prices Linked to Market

2nd disadvantage is REIT prices are linked to the market since these REITs are listed just like a stock, it is linked to market fluctuation on a daily basis. Hence, just like a stock REIT price would fluctuate on a daily basis. So it is not suitable for those who have a very low-risk appetite and only looking for a fixed return.

No Tax benefit

3rd is no tax benefit. The dividend payout from REIT is taxable as per your tax slab. So there is no tax benefit from REIT.


Conclusion

In this article, we explored the REIT investment options in India. As discussed, you can invest in REIT via both stocks or mutual fund routes. Although REITs are still in a very nascent stage in India, it provides an opportunity to diversify beyond stocks, mutual fund, gold, etc. The big question is, is worth investing in REITs. As I discussed, REIT can help you diversify your money. So you can consider investing a small portion in REITs, but make sure that you do your research before shortlisting a REIT. And if you're not confident, then you might want to track the performance of these REITs for some time and then take a decision. In the future, I expect more such REITs around real estate, including your data centers, tech parks, commercial properties, etc. What are your thoughts on REIT investments? Do let me know in the comments. And if you find this article useful, do share it with your friends. 

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