All you wanted to know about REIT

Since the launch of the first REIT (Real Estate Investment Trust) two years ago, SEBI, the market regulator, has made quite a few tweaks to REIT regulations to encourage investor participation. To improve liquidity in REITs and bring in more listings, SEBI recently announced that the minimum investment amount in a REIT be brought down to ₹10,000-15,000, with the revised trading lot at one unit; the earlier investment amount was ₹50,000, and the trading lot 200 units in the secondary market.

If you’re a retail investor who’s tired of both equities and bonds, REITs could be the new options on your menu.

REITs are investment vehicles that pool investor money like mutual funds and use it to buy a portfolio of real estate assets. They manage these assets to generate a regular income and capital appreciation. In order to ensure that the REIT is able to generate income, 80 per cent of the portfolio of a REIT should be invested in completed and rent-generating properties.

While REITs can invest in all kinds of income-generating properties — residences, offices, hotels, malls, warehouses et al , in India the listed REITs are focussed mainly on office space. Investors’ awareness and participation had been slowly improving since the listing of the first REIT in the country (Embassy REIT).

The structure of a REIT is similar to a mutual fund. It has three-tier structure — a sponsor, who is responsible for promoting the REIT with his own capital; a fund management company which is responsible for selecting and operating the properties; and the trustee, who ensures that the money is managed in the interest of unit-holders.

For now, there are three office REITs listed in the country. More are likely to hit the market soon, with SEBI’s move to bring down the minimum investment for investors.

To investors, REITs offer distinct benefits not available from plain vanilla property investments. One, REITs focus on paying out regular income from rent earned on properties.

As per SEBI’s guidelines, REITs need to mandatorily distribute 90 per cent of their income to unit-holders. The distribution could be in the form of dividend or interest income or both. Both Embassy and Mindspace REITs had so far been distributing dividend and interest to their unit-holders every quarter.

For instance, Embassy and Mindspace offer a 6-7 per cent yield to unit-holders based on their FY21 distributions.

Two, REITs offer a chance to buy into diversified property portfolio with a small outlay. Three, the listing and trading of REITs on the exchanges allow investors to buy or sell them at any time.

If you are looking to own a third alternative to stocks and bonds in your portfolio, REITs can be an option.

As a retail investor, your property investments are likely to be residential real estate and are likely to be concentrated in one location. It is also not that easy to sell property when you have urgent need of cash. REITs solve these problems by offering you exposure to commercial real estate, with both liquidity and divisibility.

While REITs have their advantages, they do come with risks. Both rent and capital appreciation depends on market conditions. Given that many corporates have extended work from home during Covid times, rental escalations and leasing decisions may get postponed.

Rental income for REITs depends on finding quality clients for office space and their ability to pay rents on time. India has only three listed REITs, making for limited choice. REIT taxation for investors is far more complicated than taxation of other fixed income investments. Finally, REIT yields in India just about match yields on safe bonds and post office schemes.

REITs are innovative, but may not be right for everyone.

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