Real Estate Investment Trust (REIT)

What are REITs?

REITs or real estate investment trust can be described as a company that owns and operates real estates to generate income. Real estate investment trust companies are corporations that manage the portfolios of high-value real estate properties and mortgages. For instance, they lease properties and collect rent thereon. The rent thus collected is later distributed among shareholders as income and dividends.

Typically, REITs offer investors an opportunity to possess high-priced real estate and enable them to earn dividend income to boost their capital eventually. This way, investors can utilise the opportunity to appreciate their capital and generate income at the same time.

Both big and small investors can park their funds into this investment option and reap benefits accordingly. Small investors may attempt to pool their resources along with other investors and invest the same into large commercial real estate projects. Properties included in REITs comprise data centres, infrastructure, healthcare units, apartment complexes, etc.

How Do REITs Generate Returns for Investors?

The goal of any investment is to generate wealth for investors and/or provide regular income. REITs provide both these benefits to unitholders. Investors can receive periodic dividends and/or interest payouts that provide regular income and at the same time, the sale of REIT units on stock markets can provide Capital Gains to the investor.

1. Dividend and Interest Payouts: Dividends and Interest are paid out by REITs from their Net Rental Income. This refers to income that a REIT receives by renting out and leasing Commercial Real Estate after the deduction of some key expenses related to the management and maintenance of the facilities. Some of the charges that are deducted from Gross Rental Income to arrive at the Net Income of a REIT include management fees, depreciation, maintenance charges, etc. The current SEBI mandate states that at least 90% of net rental income received by REITs must be paid out as dividends and interest to investors.
2. Capital Gains: REITs are listed and traded on stock exchanges, so the price of individual units changes depending upon their performance as well as market demand. Just like Equity Stocks and Mutual Funds, good performance by a REIT leads to an increase in the price of REIT units, that can be sold at a profit and provide Capital Gains to the investor. Next, let’s take a closer look at the key benefits and limitations of investing in the units of a Real Estate Investment Trust.

Advantages and Disadvantages of Investing in REITs

Advantages

• Diversification: REITs are good assets for the diversification of your investment portfolio. They offer real estate exposure without the hassle of owning and managing any commercial property. Therefore, they are an asset class that you can consider for diversification beyond the usual asset classes – equity, debt, and gold.
• Low Investment: Real estate investments are usually high-ticket investments that require greater capital. They are a good alternative to these high-ticket investments. The initial investment for REITs is around INR 50,000. Therefore, you are able to achieve real estate exposure to your investment portfolio with low investments.
• Professional Management: A REIT is a trust, association or corporation, and hence professionals manage them. You do not have to worry about managing commercial real estate properties.
• Regular Source of Income: REITs generate income through rents. It distribute 90% of the rental income to the investors as interest and dividend payments. Therefore, investors can enjoy regular income from their investments.
• Capital Gains: REITs trade on the stock market, and their performance determines their value. A well-performing REIT can thus possibly increase in value and investors can sell it at a profit over time. The investor can then enjoy the Capital Gains from their investments.

Disadvantages

• Limited Options: They are fairly new to the Indian markets. Currently, there are only a few options available, and hence limiting the investor’s choices.
• Liquidity: Though REITs trade on the stock market, the number of active retail participation is low. Therefore, liquidating REIT investments can be challenging in times of emergencies.
• Taxation: The interest or dividend income from REITs is entirely taxable in the hands of the investor. This income will be a part of the taxable income. And it will be taxable as per the applicable tax rates.

Who Should Invest in a Real Estate Investment Trust?

REITs are real estate investments that help diversify an investment portfolio and also hedge against inflation. Hence investors looking for investments other than stocks and bonds can consider investing in real estate investment trusts.

With SEBIs recent regulations, the minimum investment has considerably reduced to INR 15,000. Also, the lot size has been reduced to one unit. Hence investors who can afford to invest this amount can go ahead and invest.

It pay regular income in the form of a dividend. Hence investors looking for regular income can consider investing in real estate investment trusts. They are long term investments, and investors looking for a long-term investment can consider investing in them.

Things To Remember While Investing in REITs

As an investor, you should consider the following parameters before choosing a REIT for your investment portfolio:

• Occupancy Ratio: Check the occupancy ratio, which is the ratio of occupied or rented space to the total available space.
• Portfolio: It is essential to look at the portfolio holding of the REIT. Understanding the clientele is important. Companies across different sectors occupy spaces in REITs. Therefore, it is essential to analyse the tenant’s profiles as well. Non-payment or irregular rent payments can have an impact on the REIT. Furthermore, currently, there is no regulation by SEBI on the regularity of cash flows from leased or rented properties.
• Geographical Diversification: Assets focussed across one city can be dangerous. State-specific regulations control real estate movements, and these vary from state to state. The asset portfolio should be well-diversified across different regions to protect the interest.
• Sector Diversification: Historically seen, the IT sector has been the prime occupier of premium and high-quality office spaces. Over-dependence on one sector can be risky. As seen recently, working from home can be the new normal. Vacant spaces or non-payments will affect the REITs performance. Therefore, while choosing a REIT, ensure that the asset portfolio is well-diversified across different sectors such as Banking, FMCG, Healthcare, Pharma, etc.
• Rolling renewals and Re-leasing spread: Usually, the leasing commitment period is around five years. The rolling renewals indicate the number of tenants who are exercising their renewal options at the end of the lease period. A good number of rolling renewals will indicate stable returns. Re-leasing spread is the change in the per square feet (PSF) rate between the new and expiring leases. It is expressed as a percentage that signifies the REITs ability to execute the new leases at the increased prices for the same

REIT IN INDIA

REIT	Occupancy	52-Week High Share Price
Brookfield India Real Estate Trust	86%	Rs. 337.28
Embassy REIT	87%	Rs. 394.95
Mindspace REIT	84.60%	Rs. 365.00