Real Estate Investment Trusts or REITs can be looked like a better way to get into real estate investments. And before we get into the nitty gritties of the investment option and how it can be fruitful for investors, we will first delve on the basics of REITs.
What are REITs?
REITs share similarity with mutual fund schemes in the sense that herein investors aggregate funds for investment in underlying securities which are from the real estate sector. Nonetheless, the structure, as well as the functioning of REITs, is altogether different from mutual funds and it is basically a trust which owns investment in real estate via an SPV or special purpose vehicle.
Structure of REIT:-
The trust comprises of 3 entities namely:
Advantages of Investing in a REIT
1.Exposure to commercial reality: In India, REITs are permitted only on commercial property and hence an investor in REIT can get exposure to commercial real estate such as offices, SEZs, malls etc. Also, with tremendous growth registered for the segment in the past few years, investors ought to make reasonable gains from the investment option.
2.Tax efficient: As per SEBI's stipulations, 90% of the earnings made on REITs have to be distributed and when this is passed on to investors as dividends, there arises no tax implications in the hands of the investors or dividends are tax-free which is advantageous.
3.Viable diversification investment option: REITs are a viable investment tool that can help diversify your overall financial portfolio with holdings in a set of diversified properties and thus minimizing your risk.
4.Share low relation with equities and mutual funds: The trust in its overall operation shares a relatively lower correlation with mutual funds and equities and hence further reduce risk of the individual's portfolio.
How to invest in REITs?
For investing in REIT, you need to be holding a demat account with any of the brokerage firms. The earlier minimum investment cap in REITs has been slashed from the earlier Rs. 2,00,000 to Rs. 50,000 by the market watchdog. But the recent Embassy REIT IPO came with a minimum subscription amount of Rs. 2.4 lakh.
The future potential of REITs in India context
On the future potential of the investment option, Gulam Zia, Executive Director-Advisory, Retail and Hospitality- , Knight Frank India, a real-estate advisory firm is quoted in a leading business daily as saying, "India's future REIT potential is strong as this is one of the highest traction investment destinations for global investors closing the gaps in markets like Singapore and Hong Kong".
Embassy Office Parks REIT: India’s first listed REIT- Performance so far
On May 1, 2019, the issue completes one month of listing and since its listing on April 1, 2019 with listing price at its lowest of Rs. 308, the price of REIT has appreciated to a high of Rs. 349.2, and on May 3, it was trading at Rs. 322, providing absolute return of 7%. The returns are unlikely to sustain over a longer term as any value appreciation depends on the rental situation of Embassy Properties.
So, investors with medium investment horizon of say 3 to 5 years can consider investment in REITs as the return is likely to remain in the range of 7-9% with components of return being inflation-related and from rental space.