Magazine : 
What is REIT and How does it work in India?
Investing in real estate can be a powerful way to build real wealth, to diversify your portfolio and generate monthly cash flow through rentals and for higher capital appreciation by holding the property for at least 15 to 20 years. Real estate has historically been an excellent hedge against inflation. Real estate is a tangible asset that provides utility and can be used as collateral when securing finance.
When it comes to real estate investment historically investors chose plots for capital appreciation and flats for rental income. The higher rental yield from commercial properties which is between 8 and 10% made investors choose commercial properties over residential properties in which the yield is only 2-3%. But getting into commercial properties is not as easy as residential; the supply is limited in the prime locations and the cost to enter is higher than the residential market. Further we can split the commercial properties into office space, warehouses, hotels and shopping centres. The rental yield depends on the location and the grading of the commercial properties.
Besides rental income capital appreciation from plots is also a viable option for real estate investors.There is no market barrier in plots, you can start with just 10 to 15 lacs in the suburbs. Chennai which is considered to be the second home for real estate investment next to their birth city is witnessing similar trends , a lot of investors are pouring in their money in developing localities for capital appreciation. Owing to the huge demand for plots in OMR, ECR and GST roads the price per sqft is also increased by developers. This price increase is again creating a barrier for aspiring real estate investors to enter the market.
Similar to commercial properties the capital appreciation of plots also depends on the location. The steep price increase in plots across metro cities in recent days is becoming a barrier to retail investors.
To mitigate these challenges , REIT is an excellent option for aspiring real estate retail investors to enter the market.
What is REIT ?
A REIT is an investment trust that owns commercial properties like hotels, malls and business parks. It is created by a sponsor ( a real estate company ), who transfers the ownership of the assets from a special purpose vehicle (SPV) to a REIT in exchange for its units. The sponsor is obligated to hold certain units of the REIT. The remaining units are issued to investors through a public issue of the REIT.
The initial public offering (IPO) proceeds accrue to the sponsor who sells units of the REIT. Subsequently, tenants of the assets owned by the REIT will pay lease rentals to the SPV that manages the asset. After statutory dues and tax deductions, lease rentals flow to the REIT and it distributes at least 90% of net distributable cash flows as dividend to the unit holders. In this way, REITs provide retail investors with an opportunity to invest in commercial real estate and generate a stable rental income. ( Definition as per CRISIL ).
Advantages of REIT :
- Steady returns for the investors , since REIT companies are well established commercial properties , the managers maintain a higher occupancy rate which leads to sustain rental income.
- Along with dividends the stock price of the REIT company appreciates over the period of time like other equity stocks so investors can enjoy the capital appreciation as well.
- Since REIT companies are monitored by SEBI and properties are managed by SPV there is low to no risk associated with REIT investment.
- Easy to enter , you can buy a REIT share at a stock broking platform. Few hundred in your account gives you easy access to the market.
- Easy to liquidate , unlike other real estate products you can easily sell the REIT share in the market.
REITs have come a long way since they were introduced in the US in 1960 to give easy access to retail investors to the high quality real assets. Today REITs are in over 37 countries appreciating the assets.
How does REIT work in India ?
The structure of the REIT is similar to mutual funds in India , it has a sponsor, trustee and manager. However, unlike mutual funds, where the underlying asset is bonds, stocks and gold, REITs invest in real estate. The money collected is deployed in income-generating real estate. This income gets distributed among the unit holders. Besides regular income from rents and leases, gains from capital appreciation of real estate also form an income for the unit holders.
In India REITS was introduced in March 2019.Embassy office parks were the first REIT companies in India.
At present there are four REIT stocks trading in the open market which you can buy and hold through a trading app.
- Brookfield India Real estate trust
- Embassy office parks Reit
- Mindspace Business Park Reit
- Nexus Select Trust
How REIT dividends work and How REIT dividends are taxed?
According to Sebi rules, REITs are to distribute 90% or more of its earnings—be it divided, interest or rent—to investors or unit holders at least twice a year. Largely, REITs will distribute most of their income in the form of dividend, which is tax free in the hand of the investor.
You need to have a demat account to invest in the REITproducts.
REIT is one of the best options in real estate investment and for portfolio diversification in general.
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