Should You Invest in REITs?

Do you want to invest in commercial real estate for the long term? Are you looking to profit from the rising real estate market in India? You may invest in Real Estate Investment Trusts or REITs. It is similar to a mutual fund and exposes you to income-generating properties such as office spaces and commercial buildings. You may invest small amounts of money in REITs and profit from India’s rising real estate sector. However, should you invest in REITs?

What are REITs?

You have Real Estate Investment Trusts or REITs pooling money from several investors and investing the corpus in income-generating real estate assets. According to SEBI rules, REITs must invest a minimum of 80% of their assets in completed and rent generating properties.

You have REITs focusing on income-generating properties such as office space, hotels, warehouses and malls. However, REITs in India are allowed to invest only in office spaces and commercial real estate. According to SEBI rules, REITs distribute a minimum of 90% of their income to unitholders. It could be through interest income, dividends or both of them. 

You have REITs following a three-tier structure which is similar to mutual funds. For instance, they have a sponsor who promotes the REIT, a fund management firm that operates and manages the commercial properties and trustees who make sure the money is managed correctly according to the interest of unitholders. 

You have REITs holding properties and making money through interest income from special purpose vehicles or SPVs. It is a separate legal entity and holds the real estate assets on behalf of the REIT. You have REITs listed and traded on the stock exchange, such as NSE and BSE, where the price of units changes based on market demand, just like stocks. 

Should you invest in REITs?

You can invest in quality commercial real estate through REITs which you otherwise may not be able to afford. SEBI allows you to invest in REITs with a minimum of Rs 10,000 to Rs 15,000 with a revised trading lot at one unit. Earlier, you had the minimum investment amount of Rs 50,000 and a trading lot of 200 units in the secondary market. 

You have REITs as an attractive investment option that offers you stable income and dividends. You also gain from the appreciation in the price of the underlying asset, which is commercial real estate. It helps you diversify your portfolio with non-traditional investment avenues. 

You have REITs earning income from their rental properties, which they distribute to their investors through interest payouts and dividends. Moreover, they are traded on the stock exchange just like stocks, and the price of units rises if there is high market demand. You can sell these units at a profit, and you enjoy capital gains from the investment in REITs. 

How can you evaluate REITs?

You must check the quality of the commercial real estate in the portfolio of the REIT. It helps to check the rental yield from these commercial assets across market cycles to gauge the performance of these investments. 

You could take a look at the asset manager’s track record and the tenants of the commercial property and office space. For example, you must check if the tenants are MNC firms and their prospects for rental growth. You also have REITs looking to increase their profits by developing existing properties, adding new ones or leasing out under-construction projects.

You must check the distribution of assets of the REITs across geographies. For instance, are they heavily invested in properties in the North, West, or South of the country. You could pick a REIT that diversifies its portfolio across geographies to reduce the risk in its portfolio. It also helps if you check the track record of the REIT and its reputation in the market. 

You have REITs as a lucrative investment, especially when interest rates are falling in the economy. However, REITs are not suitable for all investors. You have only three listed REITs in India that offer you a limited choice of investment. Moreover, REIT yields could be around those of post office schemes. You have REITs struggling to find quality tenants to rent out their properties which increases the risk in investment. In a nutshell, you may invest in REITs if you understand the investment and the risks associated with them. 

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For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in

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