Real Estate Investment Trusts (REITs) are a relatively new investment vehicle in India, offering an opportunity for investors to gain exposure to the real estate sector without the complexities of owning physical properties. Introduced by the Securities and Exchange Board of India (SEBI) in 2007, the current guidelines governing REITs were approved in 2014, providing a structured framework for these investments. REITs allow individuals to invest in income-generating commercial real estate, offering the potential for regular income and capital gains. In this article, let’s explore what REITs are and how you can invest in them.

What are REITs?

Real Estate Investment Trusts (REITs) are companies that own, manage, or finance income-generating real estate properties. By pooling money from investors, REITs invest in commercial real estate like office buildings, malls, and industrial units. This gives investors the chance to benefit from real estate without directly owning property. 

Investing in REITs allows you to buy shares in a real estate portfolio, much like purchasing stocks on the exchange. This means you can start with small investments and enjoy returns in the form of rental income and dividends. REITs focus on revenue-generating properties, making them more popular in the commercial sector rather than residential real estate. 

REITs function similarly to mutual funds. Just as a mutual fund diversifies by investing in various stocks, a REIT invests in a variety of real estate assets. The income earned from properties such as rent and capital gains is distributed among REIT shareholders. 

REITs offer both small and large investors an opportunity to invest in high-value commercial real estate projects like malls, office spaces, and data centers. The income generated from these properties is shared with investors, providing them with regular dividends while also helping to grow their capital.

Eligibility Criteria to be Classified as a REIT

To qualify as a REIT, a company must meet the following criteria:
The company must be a trust established under the Indian Trust Act, 1882, and must be registered in accordance with SEBI's REITs Regulations.

At least 80% of the company's investments must be in income-generating real estate properties, with the remaining 20% allowed for other types of investments.

A maximum of 10% of the total investment can be allocated to under-construction properties.
REITs are limited to investing in commercial real estate and office spaces only.

A minimum of 90% of the total income generated must be distributed to shareholders in the form of dividends.
The REIT must have an asset base of at least Rs. 500 crore.
The Net Asset Value (NAV) must be declared at least twice a year.
The REIT must be listed on a stock exchange.

These requirements ensure that REITs operate transparently and remain focused on generating income for their investors through commercial real estate.

Types of REITs

REITs can be categorized in different ways based on the types of business activities they engage in, as well as the methods used to buy and sell shares. Here are the main types of REITs:
Equity REITs: These are among the most popular types and focus on owning and managing income-generating commercial properties. Their primary source of income comes from rents collected from these properties.

Mortgage REITs (mREITs): These REITs are primarily involved in providing loans to property owners and acquiring mortgage-backed securities. They generate income through the interest earned on the money they lend.

Hybrid REITs: This type allows investors to diversify their portfolio by investing in both equity REITs and mortgage REITs. As a result, income is generated from both rents and interest.

Private REITs: These REITs are available only to a select group of investors and are not listed on public stock exchanges. They are not registered with SEBI and are typically offered as private placements.

Publicly-Traded REITs: These REITs are listed on national securities exchanges and regulated by SEBI. Individual investors can buy and sell shares in these REITs through the stock market.

Non-Traded Public REITs: These REITs are registered with SEBI but they are not listed on any exchange. While they are less liquid compared to publicly traded REITs, they offer more stability as they are not exposed to market fluctuations.

Benefits & Limitations of Investing in REITs

Investing in REITs offers several benefits. One of the key advantages is diversification, as REITs provide exposure to real estate without the hassle of owning and managing commercial properties. This allows you to diversify your portfolio beyond traditional asset classes like equity, debt, and gold. As compared to directly investing in real estate, REITs have a small initial investment requirement (typically around Rs. 50,000), making it much more affordable.

Additionally, REITs generate regular income from rental collections and are required to distribute at least 90% of their income to shareholders as dividends, providing a steady income stream. Lastly, REITs offer the potential for capital gains. Since they are traded on the stock market, their value can appreciate over time, allowing investors to sell at a profit.

However, there are some limitations to consider. One major drawback is the limited availability of REITs in India, with only a few domestic REITs and one international REIT fund available, limiting investment options. Another issue is low liquidity; while REITs are listed, there are relatively few market participants, especially among retail investors, which can make it difficult to sell REITs quickly or profitably. Additionally, dividends and interest from REITs are fully taxable based on the investor’s tax slab, which means that those in higher tax brackets may see a substantial portion of their income lost to taxes. It’s essential to consider the tax implications before investing in REITs.

Who Should Invest in REITs?

Investing in Real Estate Investment Trusts (REITs) in India is a great option for those who want to gain exposure to the real estate sector without the complexities of property ownership. People looking for portfolio diversity and passive income find REITs particularly attractive. Because of their flexibility and liquidity, they are a desirable option for real estate investors who still want to be able to acquire and sell shares with ease.

Before deciding if REITs are the right investment for you, it’s important to consider the pros and cons, as well as your own risk tolerance and investment goals. By evaluating these factors, you can determine if REITs align with your financial strategy and investment capacity.

How to Invest in REITs?

REITs are listed and traded on stock exchanges, much like Exchange Traded Funds (ETFs), making the stock market the most convenient way to invest in them. The price of REIT units fluctuates based on demand and the performance of the properties they own. While you can buy REITs directly on the stock market, some mutual funds also invest in REITs, though their exposure is limited.

There are three main ways to invest in REITs in India:

Equity REITs: These provide exposure to real estate without owning properties, offering liquidity and diversification.

REIT Mutual Funds: Managed funds that invest in REITs and real estate securities.

REIT ETFs: Investment funds that hold a diversified portfolio of REITs and real estate assets.

Conclusion

REITs present an appealing investment option for those looking to diversify their portfolios and earn passive income from real estate without the burdens of direct ownership. While they offer various benefits such as professional management, liquidity, and regular dividends, potential investors must also consider factors like limited availability and tax implications. By weighing the pros and cons, individuals can make an informed decision about whether REITs align with their investment objectives and risk profile.