While Germany holds the position of having the biggest real estate market in Europe and CapitaLand Group makes Singapore the top in Asia.
We in India try to gauge our position in REIT market and grapple with the basic question, “Is it a worthy option in India to make investments?” Nonetheless, curiosity is the human nature and that is how we progress.
Before heading on further into the subject of this rite-up, let us first get a basic overview of REIT, its structure and working.
What is REIT, and how does it work?
REIT is an acronym for Real Estate Investment Trust, that pools money from the investors and capitalizes them into profit -generating properties.
Quite similar to mutual funds which invest the mutual capital into stocks, debts, bonds and other securities, REIT puts the capital into residential properties, hospitals, shopping malls, restaurants, corporate buildings and offices and so forth.
The said trusts are licensed to work by SEBI, which is the statutory and regulatory government body in India for investment and securities sector.
REIT involves a Fund Management company, a Trustee, and a Sponsor.
Herein, the FMC (fund management company) chooses and operates the REIT, while the Sponsor is responsible for setting it up.
The job of a Trustee is to ascertain the proper investment of investor’s capital and abide by all the rules and laws defending the rights of investors.
Working of REITs
The REITs at first, have to register themselves at the stock exchange and release their IPO (initial public offering) to sell their units.
These unit shares are further bought and sold as securities in stock exchange.
As per SEBI, an REIT should hold assets of about Rs. 500 crores and minimum issue size must be less than Rs. 250 crores.
Investing in REITs is just like buying stocks in the primary or secondary market. However, the minimum size of a ticket for partaking in REITs is set at Rs. 2 lacs.
Now, the trust collects fund from the investors and invests it into different real estate projects.
As said, the portfolio may involve warehouses, institutions, hospitals, offices, and more.
The investor enjoys the profits either from the dividends or from the capital gains earned by the trust in selling a property in a profitable deal.
Now, let’s face the question,
Should you invest in REITs in India? Is it worth it?
The concern is aptly valid. Real estate in India still is yet a low-demand and quite unorganized sector.
And there are reasons which are its limitations as well, like liquidity crisis.
Most of the people in India attempt to own properties to either let them or sell them off at a better price.
Leaving the properties on rent is a good source of regular income here, which can increase with time.
Furthermore, the property values do not show much volatility unlike stock and equities. Hence, making it a preferable option to invest.
Now, let’s put the ticket size f real estate into perspective, which ranges from few lacs to crores.
This is definitely not quite affordable cost by most of the middle-class population of India.
On the other hand, ticket size of REITs is quite reasonable and also provides the benefit of portfolio diversification.
So, in case you find yourself attracted to real estate investments in India, but have less treasure, then REIT can be your smart go-to.
Limitations of REITs in India
- It can be a prerogative for upper-middle class or bourgeoisie solely and majorly.
- Rental revenue and capital gains rest on factors like location, infrastructure, and other related factors.
- Liquidity crisis due to unsold properties and less demand often holds back the investors.
- REITs are subject to market fluctuations, making it apt for high-risk appetite investors.
- The promise of capital gains is really low in REITs.
- No tax-benefits availed, since dividends are taxed.
Are there any risks involved in investing in REITs in India?
REITs in India are yet sprouting and developing, so it would not be prudent to reckon the perils associated with it.
Nonetheless, being a concentrated investment, the properties in a project may suffer no occupancy, unsatisfactory rental income, and more.
Benefits of investing in REITs in India
SEBI asks the REITs to invest the pooled money in at least two projects.
And if they capitalize in 2 ventures only, the invested amount should be 60% of its mutual asset in one venture.
While, they have to finance 80% of the wealth in ready or income-generating projects.
And the remaining 20% of the fund has to be capitalized in mortgage-based securities, cash equivalents, under-construction projects and so forth.
Investors will get minimum 90% of their rental revenues every 6 months from the REIT as set by SEBI.
And if the properties are sold off, then they need to allocate 90% of the capital appreciation to the investors.
SEBI guidelines are stipulated to ensure the transparency in the working, such as revealing the investment valuation and also upgrading them every 12 months.
Another benefit here is that REITs are a great option to diversify the investment portfolio and scatter your risks.
And the income is quite steady, giving the benefits of capital accrual in the long term.
Moreover, in long-term REITs investments also help in combating inflation.
It is a good alternate to protect the capital of the investors from inflation more as compared to stocks and equities.
In this write-up, we batted about REIT and the practicality of investing in it in India.
REITs are quite like mutual funds, as they pool money from the investors, and invest the capital into income-generating properties.
They can invest into projects like offices, data centres, warehouses, hospitals, institutions, and complexes.
While the investors enjoy the returns either from rentals or capital gains after selling off the properties in a profitable deal.
Further, it also helps in portfolio diversification.
REITs in India is yet not quite developed and organized segment, and until now, it mostly serves upper-middle class or bourgeoisie groups.