Ever wondered if you can buy a piece of large chunk of a good quality real estate with as low as INR 50,000? Answer is Yes! It is possible to buy it through a unit of a REIT!
Now what is a REIT? REIT or Real Estate Investment Trust is a company that owns and operates real estate to generate income. Simply put, it is akin to a mutual fund –
with investments in real estate property,
structurally similar having a sponsor and trustee and
pools capital from many investors.
FinFact: The REITs were first created in the United States in 1960 after President Dwight D. Eisenhower signed Public Law 86-779, sometimes called the Cigar Excise Tax Extension of 1960. In 1971, there were 34 REITs in US with a market cap of USD 1.5 billion (bn). Presently (2020), there are 223 REITs in US with a market cap of USD 1,249.2 bn!
India legalized the REIT framework in September 2014 when Securities and Exchange Board of India (SEBI) passed a regulation for rules governing the REITs.
How does a REIT work?
A REIT consists of few residential / commercial / warehouses / logistics park / data centres which are pre-leased i.e., income generating assets
In India, we have 3 listed REITs and they focus on commercial real estate:
Embassy (listed in March 2019),
Mindspace (July 2020) and
Brookfield (Feb 2021)
These income generating assets are pooled together and these assets together form a REIT.
The REIT entity needs to be structured as a business trust or as a corporation.
They need to invest atleast 75% of its assets in real estate
They need to derive 75% of its gross income from mortgage interest or rents
They are required to pay atleast 90% of the taxable income to the shareholders
The publicly traded REITs are regulated by SEBI and listed on stock exchanges – hence they offer liquidity (unlike the traditional brick and mortar real estate property)
Some other requirements:
Be managed by Board of Directors or Board of Trustees
Have atleast 100 shareholders
Less than 5 individuals should not hold 50% of its shares
What are the types of REITs?
Equity REIT:
They own and operate income generating commercial properties
Common source of income is lease rentals
They are the most popular REITs
Mortgage REIT:
They lend money to real estate owners, through mortgages
They generate income in the form of interest on the money lent to proprietors
REITs can also acquire mortgage-backed securities
There are also Hybrid REITs – which are a mix of Equity and Mortgage REITs and Private REITs – which are not traded on an exchange and are not regulated.
FinFact: As on 30th April 2021, 3 REITS are listed in India, with approx. market cap of ~INR 49,000 cr (USD 6.7 bn). A recent JLL report mentions that India has the potential to unlock ~ INR 260,000 cr (USD 35.6 bn) worth real estate properties comprising of 278 mn sq ft into REIT assets.
What do REITs offer to investors?
Liquidity: REIT shares are publicly traded on the stock exchanges (like equity stocks)
Steady Income Stream: The REIT income is from pre-leased assets and hence, the dividend / interest payout is know in advance offering a steady income stream to the investors.
Portfolio Diversification: Apart from being an alternative asset class and providing portfolio diversification, within REITs there are various asset classes like residential, commercial, warehousing, etc which provide further diversification.
Generally, a real estate property is quite expensive to buy. REIT offers a way to buy a part of similar real estate with lesser cash flows.
Along with the above benefits, investors need to understand that the REITs are subject to market risks in terms of its share price and the income stream may be taxable in the hands of the investors.
To summarize, REIT offers an additional asset class with combined benefits of real estate (underlying assets) + equity (share price movement) and the most important tool – Liquidity in real estate.
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Useful Article
Good article. Would also like to read about how to invest in REIT for retail investors.