How To Invest In REITs In India?

Because of the capital appreciation and inflation hedging it provides, the real estate sector in India has traditionally been a highly preferred asset class for investors. Due to the inherent limitations of owning a property, such as the large initial investment, lack of geographic diversification, and tight liquidity, among other factors, a more diversified and secure investment opportunity in the form of real estate investment trusts, or REITs, is being considered for investment.

REITs allow investors to invest in a portfolio of income-producing real estate assets by acquiring REIT units, which are comparable to mutual fund units. The REIT then distributes any income generated by the underlying real estate assets to its unitholders. Before you invest in REITs, here’s what you should know.

How can I invest in Indian REITs?

Commercial property, such as stores and office space, is a less typically used kind of Real Estate investment. However, huge ticket sizes of Rs. 1 crore or more are common in this sort of Real Estate investment, particularly in Metro and Tier 1 cities. When you factor in the difficulties of obtaining the necessary permissions, obtaining long-term leases from viable tenants, and assuring prompt rent payment, it’s no surprise that few people pick this investment option.

There is, of course, another method to get into real estate investing: buying stock in publicly traded real estate corporations. However, these investments are subject to market risk, and despite the fact that real estate is the underlying asset, they are more correctly classified as mid or small-cap equity investments with a high degree of volatility. As a result, only a small percentage of people can include real estate in their portfolio. However, a new option to invest in commercial real estate has arisen in India in recent years: the Real Estate Investment Trust, or REIT.

REITs are publicly traded real estate investments that allow investors to participate in the real estate market without having to buy or manage properties themselves. In this blog, we’ll go over what REITs are, how they work, how they perform, how they’re taxed, and whether or not you should invest in them.

What are REITs?

President Eisenhower signed the REIT Act title into law as part of the Cigar Excise Tax Extension of 1960, which gave birth to the REIT idea. The REIT was founded by the US Congress to allow US investors to invest in and profit from diverse, large-scale, professionally managed real estate portfolios in the United States.

REITs are similar to Mutual Funds in that they allow several investors to pool their funds and the assets are professionally managed by a designated Manager in both situations. However, while Mutual Funds’ underlying assets are typically Equity, Debt, Gold, or a combination of these, REITs’ underlying assets are primarily Real Estate Holdings or loans secured by Real Estate.

When a real estate company agrees to establish a Real Estate Investment Trust, it becomes the REIT’s Sponsor and names a Trustee. The Trustee holds the Trust’s Real Estate Assets in its Trusteeship, and the Sponsor no longer has direct control over these assets. A REIT can direct or indirectly control its Real Estate Holdings by using a Special Purpose Vehicle (SPV). In the case of REITs, the SPV is a domestic corporation that holds the REIT’s Real Estate Assets on its behalf, and according to regulations, the Trust must own at least 50% of the SPV.

The Trustee then hires a Manager to administer the Trust’s Real Estate Assets and make investment decisions on its behalf. The REIT can be registered after the Manager has been appointed. Once established, a REIT can raise funds by selling units to the public on stock exchanges or to private investors.

A REIT unit, at its most basic level, reflects part ownership of the Trust’s Real Estate Assets and entitles the unit holder to a portion of the REIT’s income. A REIT is typically obligated to pay out at least 90% of its Net Taxable Income in dividends and interest to its unitholders. The following section will introduce you to the many types of REITs available around the world.

Different Types of REITs

The following are the several types of REITs available internationally, based on the type of Real Estate holdings:

Retail REITs: These REITs must invest at least 24% of their assets in commercial retail, such as shopping malls and standalone retail establishments.
Residential REITs: These are Real Estate Investment Trusts that own and operate rental apartment complexes and manufactured homes.
Healthcare REITs: As their name implies, these trusts invest in and run healthcare-related Real Estate such as hospitals, nursing homes, retirement communities, and medical centers.
REITs that invest in and manage office space are known as office REITs. The rental income obtained from tenants with long-term leases is thus the primary source of income for this form of REIT.
Mortgage REITs: In these REITs, around 10% of assets are placed in mortgages rather than tangible real estate.

Now that we’ve reviewed the basics of REITs, let’s look at how they work in India.

REITs in India

The concept of a Real Estate Investment Trust is relatively new in India, with SEBI (Securities Exchange Board of India) issuing the first guidelines in 2007. In September 2014, the SEBI approved the existing REIT criteria in India.

In India, just three REITs are now accessible for purchase: Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust. Other major real estate companies, such as DLF and Godrej, are expected to launch REITs in the future.

A REIT in India has a three-tiered structure with a Sponsor, Manager, and Trustee, each of whom performs important tasks for the Trust. According to SEBI, their primary functions and responsibilities are as follows:

Sponsor – Typically, this is a real estate firm that owned the assets previous to the REIT’s formation. The Brookfield REIT, for example, is sponsored by BSREP India Office Holdings V Pte. Ltd., an Indian affiliate of Brookfield Assets Management Inc., based in the United States. The Sponsor is in charge of forming the REIT and naming the Trustee. For the first three years after the establishment of a REIT, the REIT Sponsor and the sponsor group are required to possess 25% of the units. After three years, the sponsor investment might be reduced to 15% of the total REIT units outstanding.
Manager – A real estate investment trust (REIT) manager is usually a corporation that specializes in facilities management. Brookprop Management Services Pvt. Ltd., for example, has been selected as the manager of the Brookfield REIT. Responsible for managing the REIT’s assets, making investment decisions, and guaranteeing the REIT’s timely reporting and disclosure.
Trustee – Companies that specialize in delivering Trusteeship services are often chosen to serve as REIT Trustees. Embassy Parks REIT and Brookfield REIT, for example, have Axis Trustee Services Limited as its trustee. The Trustee is in charge of holding the REIT’s assets in trust for the benefit of unitholders. They are also responsible for overseeing the manager’s activities and ensuring that dividends are distributed on time.

an important addition The following are the SEBI-mandated requirements that REITs in India must meet in order to qualify:

A REIT’s investments must consist of at least 80% commercial properties that can be rented out to generate revenue. The trust’s remaining assets (up to a maximum of 20%) can be invested in stocks, bonds, cash, or under-construction commercial property.
At least 90% of the REIT’s rental income must be delivered to unitholders in the form of dividends or interest.

We’ll go over how real estate corporations benefit from the formation of REITs in the next section.

Why are REITs Created?

REITs clearly enable investors to invest in and benefit from commercial real estate, which is otherwise out of reach for small retail investors. However, there are a few advantages to real estate corporations forming a REIT. REITs also benefit from a few significant tax breaks not available to other types of Real Estate firms in India:

Interest and dividend payments received by a REIT from a Special Purpose Vehicle (SPV) are tax-free. In this sense, an SPV is a domestic firm in which the REIT owns at least a 50% share. A REIT can theoretically control 50% or more of several SPVs that own separate Real Estate properties on the REIT’s behalf.
Any revenue earned from renting or leasing Real Estate Assets owned directly by the REIT (rather than through an SPV) is also tax-free.

Real estate companies may be able to minimize their tax obligation and produce more revenue as a result of these tax benefits. Furthermore, by listing a REIT on the stock market, a Real Estate business might gain access to extra money for future projects through an initial public offering (IPO). The purpose of any investment is to generate profits for the investor, so let’s look at how REITs accomplish this.

How Do REITs Generate Returns for Investors?

Any investment should aim to build wealth for investors and/or provide a steady stream of income. REITs provide unitholders with both of these advantages. Investors can get monthly dividends and/or interest payouts, providing consistent income, while also receiving capital gains through the sale of REIT units on stock exchanges.

Dividends and Interest: REITs pay out dividends and interest from their net rental income. After deducting some important expenses connected to management and maintenance of the facilities, this is the income that a REIT obtains from renting out and leasing Commercial Real Estate. Management fees, depreciation, and maintenance charges are some of the charges deducted from Gross Rental Income to arrive at a REIT’s Net Income. According to the current SEBI mandate, REITs must pay out at least 90% of net rental revenue to investors in the form of dividends and interest.
Capital Gains: Because REITs are listed and traded on stock exchanges, the price of individual units fluctuates based on performance and market demand. A REIT’s outstanding performance, like that of Equity Stocks and Mutual Funds, leads to an increase in the price of REIT units, which can then be sold for a profit and deliver Capital Gains to the investor. Let’s take a closer look at the primary advantages and disadvantages of investing in Real Estate Investment Trust units.

Benefits and Limitations of Investing in REITs

Diversification: Real estate investment trusts (REITs) allow you to diversify your investment portfolio by exposing you to real estate without the difficulties of owning and managing commercial property. As part of your overall Asset Allocation Strategy, this diversification allows you to move beyond the traditional asset groups of equity, debt, and gold.
Small Initial Investment: As previously said, one of the major drawbacks of real estate investing is the huge ticket size, particularly in the case of commercial properties. To deliver similar portfolio diversification benefits, REITs require a significantly smaller initial investment of roughly Rs. 50,000.
Professional Management: A REIT’s properties are professionally managed. This ensures that activities run smoothly and that you don’t have to put in any effort to manage Commercial Real Estate.
REITs produce money from rental collections and are obligated by law to transfer 90% of this income to investors in the form of dividends and interest payments. REITs provide investors with consistent income in this way.
REITs are listed and traded on stock exchanges, and their value is determined by their performance. A well-performing REIT can thus possibly increase in value and be sold at a profit over time. The investor receives Capital Gains as a result of this.
There are currently just three REITs and one International REIT Fund of Fund in India. This severely restricts the options available to investors.
Low Liquidity: While REITs are listed and traded on stock exchanges, the number of market participants, particularly among individual investors, is currently low. As a result, profitably selling REIT investments may be difficult, especially in an emergency. As a result, the investment’s liquidity is minimal.
Dividends and interest received from REITs are fully taxable in the hands of the investor, according to the appropriate slab rate. As a result, taxpayers in the 30% tax bracket will see a significant amount of their dividend income go to taxes. The taxes requirements, which are explained next, are another crucial factor to consider before investing in REITs.

Taxation Rules for REITs

Because REITs generate various sorts of income, two different taxes procedures apply: one for dividend income and the other for capital gains. Furthermore, when an investment is redeemed through an International REITs Fund of Fund, the tax treatment is different. The following are the taxation rules that apply:

Dividend Taxation: Dividends received from REITs are totally taxable in the hands of the investor under existing rules. REIT dividend payouts are included in the investor’s annual income and taxed at the investor’s slab rate for the corresponding Financial Year.
Capital Gains Taxation: Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) are both applicable to equity investments and cover capital gains from the sale of REIT units. The STCG is applicable if the units are held for a duration of one year or less from the date of allocation. The capital gains tax rate on capital gains from the selling of units is 15%. LTCG taxation regulations apply if the holding duration exceeds one year from the date of unit allocation. The LTCG tax rate is 10% on gains over Rs. 1 lakh (across all equity investments for the applicable FY) and there is no indexation advantage.
Capital Gains Taxation for International REIT Fund of Funds: Capital Gains obtained from the sale of units of International REIT Fund of Funds are subject to non-equity capital gains taxation. If the holding period is three years or less, Short Term Capital Gains are applicable (calculated from the date of unit allocation). In this situation, the STCG is calculated using the investor’s applicable slab rate for the fiscal year. The LTCG tax is 20% on indexed Capital Gains on units held for more than 3 years, calculated from the date of unit allocation. Let’s look at how you might invest in REITs next.

How to Invest in REITs

Because REITs, like Exchange Traded Funds (ETFs), are listed and traded on stock exchanges, buying units on the stock market is the best way to invest. As a result, if you want to invest in REITs in India, you’ll need a Demat Account. The price of REIT units on stock exchanges fluctuates based on demand for units as well as the REIT’s performance, just as that of Exchange Traded Funds. Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust are the three options available right now.

You can invest in REITs through mutual funds in addition to stock market transactions. Currently, the Kotak International REIT Fund of Fund is India’s only international mutual fund that invests solely in international real estate investment trusts. In recent years, a few domestic mutual funds have begun to participate in REITs; nevertheless, their real exposure to this Real Estate Investment is fairly restricted. As a result, the only option to get meaningful exposure to real estate right now is to buy REIT Units on the stock market. Now that you know the major features, benefits, and restrictions of REITs, as well as how to invest in them, let’s tackle the big question: “Should you invest in REITs?”

Is REIT a good investment in India?

As a result, in addition to cheap entry levels, REITs offer investors a safe and diversified portfolio with low risk and expert management, providing good returns on investment. REITs will be distinguished not only by their investment in real estate assets, but also by their restricted responsibility for all unitholders.

That’s not all, though. According to the criteria, finished projects must account for 80% of assets, while under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities account for 20%.

REITs allow investors to put their money into a diverse portfolio of commercial real estate assets. Investors who choose the direct investment path for commercial office spaces invest in a single office building.

Will REITs be able to provide the same returns on investment as’actual’ real estate investments? This is a question that small investors will be asking. No, that is not the case. Certainly, investors expecting for unreasonable profits (>20-30 percent) should go elsewhere. It’s critical to have realistic expectations for REIT returns. After adjusting for the fund management cost, a realistic ROI estimate would be in the range of 7-8 percent each year.

The return on investment (ROI) from REITs will be highly structured, realistic, and risk-averse. Investors who desire a regular income with no risk might consider REITs. Furthermore, REITs can provide investors with two types of income: capital gains from the selling of REIT units and dividend income. REITs will also be a good investment option for investors who want to diversify their portfolio beyond gold and the stock market.

REITs have already been introduced in India, and investors have seen excellent returns. The successful REIT listings in India have piqued investor interest in this new investment vehicle, and we expect more REIT listings to follow soon.

Can I buy 1 share of REIT?

REITs (Real Estate Investment Trusts) are a relatively new asset class for ordinary investors in India. It is not entirely understood, as with anything new, and hence can be daunting. Single REIT units can now be exchanged like stocks under the new rules. As a result, if you want to invest in this asset class, you must first comprehend it.

REITs are investment trusts that own, operate, and manage a portfolio of commercial properties that generate income. They’re a type of alternative investment that allows people to buy modest pieces of high-quality income-generating commercial real estate. It allows investors to earn annuities and income for the rest of their lives. So, if you buy a REIT asset, you can keep it for as long as you want and earn consistent income while doing so.

The National and Bombay Stock Exchanges (NSE & BSE) sell REIT units, which are listed on the Securities and Exchange Board of India (SEBI). A REIT unit can be purchased or sold in one of three ways: on the BSE or NSE, online, or through a licensed broker. You can also purchase REIT units when the company files for an IPO (IPO).

The REIT sponsors and managers invest in AAA-rated commercial office buildings with high-profile international tenants who are committed to long-term leases. The REIT’s income is derived from the monthly rents they pay, and 90 percent of that income must be paid to unitholders. The hotels, restaurants, and food courts within the commercial complexes also contribute to the bottom line.

If the asset quality is maintained, real estate is an appreciating asset. To that end, REIT managers guarantee that the property is well-managed in order to attract the best tenants and generate high rental returns. The income of the unit holders increases as the asset appreciates in value. Michael Holland, CEO of Embassy REIT, explains. “At least two independent valuers revalue the asset’s capital value every six months.” As a result, the market price of the units rises. Even if you buy REIT units, you will receive the unlocked value of capital appreciation every six months.

SEBI has announced that, unlike in the past, single REIT units can now be acquired and sold on the open market. Many investors were concerned that the pandemic-induced lockdown, as well as the resulting Work From Home (WFH) culture, would reduce the value of these assets. All three REITs are now highly weighted toward the IT sector.

Bengaluru, Mumbai, Pune, and Noida are among the cities where the Blackstone-Embassy REIT has properties. The Brookfield India REIT has holdings in Mumbai, Gurugram, Noida, and Kolkata, while the K Raheja-sponsored Mindspace REIT has assets in Mumbai, Hyderabad, Pune, and Chennai. Clearly, information technology is the engine and backbone of this investment asset.

Because most firms have steadily gone digital as a result of the pandemic, it has been a benefit to that sector. Unlike the United States and the United Kingdom, where the average age of IT employees is 40 years, just 7-8 percent in India are above the age of 40.

The majority of the IT employees are in their twenties and thirties. As a result, home environments are not conducive to working, and the additional amenities offered in tech parks have been a draw to get them back to work. As a result, asset managers have guaranteed that additional leisure and entertainment amenities within tech parks are well-managed. This results in increased income for the REIT and higher returns for unitholders.

According to Holland, another evidence of the IT sector’s health is the fact that IT hiring has doubled in the last five years. This will most likely result in new and increased leasing to accommodate the workforce. IT businesses typically favor secondary business areas, where property costs are more reasonable, than city centers, which are more expensive. This low rental cost for major space users, combined with the knowledge that the space is in high demand and may not be available for lease again in that development if it is given up, has led to IT companies keeping the space even during the lockdowns. Companies hold on to space when the annual rental value per square foot is less than or equal to the cost of outfitting it, according to SC Jaisimha, Executive Director, Cresa India. All of these variables result in consistent rental income for REITs.

As a result, as of June 30, 2021, all three REITs are among India’s top ten publicly traded real estate companies: Embassy REIT has Rs 329 billion, Mindspace REIT has Rs 174 billion, and Brookfield REIT has Rs 77 billion. The regular rental profits are secured because the laws stipulate that at least 80% of the portfolio must be completed and income-earning projects, with a maximum of 20% being under-construction assets.

Let’s see how REITs stack up against other property-based asset classes like shares and direct investing. Both REITs and equity shares are single-unit purchaseable instruments that are freely transferrable and professionally managed.

Direct real estate investments, on the other hand, typically need a minimum investment of Rs 25 lakh, are locked-in, illiquid, and come with transaction charges. Management standards are also unregulated and thus unassailable.

According to current legislation, REITs must have Grade A assets in prime locations and be largely office complexes with high-profile tenants from a variety of industries. This ensures a consistent rental revenue. Equity stocks are a mix of Grade A and B office, residential, and retail stocks with different tenants from various industries. In this asset class, rental revenue and occupancy rates can be more variable. Direct investment is typically made in single-tenant buildings with single-tenant risks. That investment will not yield a consistent income if the renter quits or if the sector underperforms.

REITs earn money through capital appreciation and regular cash distributions (which are required in 90% of cases), RE equity shares earn money through capital appreciation and dividends (which are not required in 90% of cases), and direct investments earn money only through a timely and profitable exit.

Direct investments are taxable, but REITs and RE equity dividends are tax-free.

The most significant advantage of REITs is that they are heavily regulated. It reduces the risk of a retail investment by requiring at least 80% of the value to be in completed and income-producing assets, assuring consistent cash flows. Speculative land acquisition is subject to constraints. At least 90% of the distributable cash flows must be distributed every two years.

The amount of debt that can be accumulated is limited. If the debt surpasses 25% of the asset value, unitholder consent is necessary. Debt must never exceed 49% of the value of the assets. All committees must have a representation of at least 50% of independent directors on the board. With the permission of 60 percent of unrelated unitholders, the REIT manager can be fired. Due to a distribution-linked management fee structure, the interests of unit holders are aligned.

Sponsors are prohibited from voting on their linked party transactions, among other safeguards. Acquisition or sale of assets worth more than 10% of the REIT’s value requires the approval of a majority of unitholders. The difference between the average valuation of two independent valuers and the acquisition value cannot be higher than 10%.

If a connected party leases more than 20% of the underlying asset, an independent valuer’s fairness judgement is necessary.

Investing in IT assets backed REITs is currently a solid idea for the short and medium term, as digital firms and solution providers are experiencing strong growth. As the regulator opens up new kinds of rental income earning assets to be grouped under this umbrella, many more REITs are expected to reach the market in the future.

(Data taken from a recent press conference in which Michael Holland, (CEO) Embassy REIT, and Srikanth Subramanian, Head Senior Executive Director, Investment Products, Kotak Mahindra Bank, discussed the ins and outs of REIT investing and why they are smart investments.)

Can you lose money in a REIT?

REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
Investors find it difficult to sell non-traded REITs because they have low liquidity.
When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.

Is REIT dividend taxable in India?

Pankaj Mathpal, Founder & CEO of Optima Money Managers, said, “Long-term investment in REITs helps an investor earn more.” “REIT investment is preferable to direct real estate investment since it provides greater liquidity to the client. Aside from that, when investing in REIT shares, the investor receives an indexation benefit on long-term investments, which is not accessible when investing in direct real estate. In a long-term REIT investment, cost appreciation is applied to one’s income, resulting in a lower net income tax outgo, but in real estate, one’s income is simply the difference between the buy and sell price of one’s property.”

Vishal Wagh, Research Head at Bonanza Portfolio, highlighted the income tax benefit of long-term REIT investing, saying, “The REIT is tax-free on the interest and dividends it receives from the SPVs. Rental revenue earned by the REIT, which it would have earned if it owned property directly, is likewise tax-free. The REIT’s rental revenue is tax-free in its hands, but taxable in the hands of the investors. When selling valued stock, you can spread out the capital gains over a period of years. Unfortunately, real estate investment does not have the same benefit; you must claim the entire gain on your taxes in the year the property is sold.”

Do all REITs pay monthly dividends?

REITs that pay out on a regular basis. While most REITs pay quarterly dividends, certain REITs pay monthly dividends. This can be beneficial to investors, whether the money is used to increase income or to reinvest, because more frequent payments compound more quickly.

Why REITs are bad investments?

Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.

The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.

Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.

REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.

How many REITs are there in India?

“Every person who invests in well-selected real estate in a rising portion of a successful city selects the surest and safest path of becoming independent, for real estate is the basis of prosperity,” US President Theodore Roosevelt famously observed. Over hundreds of years in India, real estate has been the most popular form of investment, and interest in real estate has traditionally meant owning private property primarily for self-residence.

The option of investing in commercial real estate, such as shops and office space, has been comparatively less explored, as such investments require large investment amounts; and, in addition to the investment hurdles, the hassles of obtaining necessary regulatory approvals, long-term leases from viable tenants, and ensuring timely receipt of lease rent, form the major reason for which investment in commercial real estate is expended.

Prior to the introduction of the Real Estate Real Estate Investment Trust (“REIT”), another popular option to obtain exposure to the real estate sector was to invest in the equity securities of publicly traded real estate businesses such as DLF, Embassy Office, Oberoi Realty, and others. However, despite the fact that real estate is the underlying asset, such investments have always been subject to market risk and involve a high level of volatility. As a result, only a small percentage of people are able to include Real Estate in their investing portfolio.

By enacting the SEBI (REITs) Regulations, 2014 as amended from time to time, the Securities and Exchange Board of India (SEBI) introduced the concept of REITs in India with the goal of providing much-needed capital to the real estate sector and channeling funds from retail investors into the formal system. The SEBI REITs Regulations, among other things, set out the registration requirements, procedure for registration, and eligibility requirements for REITs. However, all REIT units, whether publicly issued or privately placed, must be listed on a recognized stock exchange with nationwide trading terminals.

REITs, or real estate investment trusts, are investment vehicles that, like mutual funds, own, operate, or finance rent/income generating real estate assets such as apartment complexes, office buildings, hotels, and retail malls. REITs are real estate investment trusts (REITs) that hold or finance income-producing real estate across a variety of property industries. They offer all investors the option to own valuable real estate, as well as dividend-based income and overall returns, while also assisting communities to grow, thrive, and revitalize. REITs enable people to invest in real estate asset portfolios in the same way they do in other industries: by purchasing individual business shares or a mutual fund or exchange-traded fund. A REIT’s owners receive a portion of the income generated by real estate investment – without having to buy, operate, or finance the property themselves.

Real Estate Investment Trust (REIT) is an abbreviation for a corporation that develops and owns ‘income producing’ real estate holdings. A REIT, unlike a publicly traded real estate business, isn’t founded to construct and resell real estate properties; rather, its primary goal is to purchase real estate holdings with the express purpose of leasing them and managing them to maintain a steady yield as part of an investment portfolio. REITs provide investors with meaningful real estate exposure without requiring them to own or manage properties on their own.

REITs and Mutual Funds are similar in that they both allow investors to combine their resources and have the assets managed by a designated person-in-charge. However, while mutual funds’ underlying assets are typically equities, debt, gold, or a combination of these, REITs’ underlying assets are primarily real estate holdings or loans secured by real estate.

When a firm agrees to form a REIT, it becomes the REIT’s sponsor and names a trustee. The underlying real estate assets of such established trust are held in trusteeship by the trustees, and the Sponsor no longer has direct authority over these assets. To qualify as a REIT, companies that own or finance real estate must meet a variety of organizational, operational, distribution, and compliance standards.

Though the first REIT in India was only established in March 2019, it was an equity REIT that was only allowed to invest in commercial properties according to SEBI requirements. Nonetheless, given the Real Estate sector’s dynamic nature and ongoing flux, it’s not impossible that other types will emerge in the near future. REITs can be classified as follows based on their Real Estate holdings:

1. Real Estate Investment Trust (REIT)

REITs like these buy, manage, build, and sell real estate, and then pay out the majority of the profits to their shareholders in the form of dividends. When people talk about REITs, they usually mean stock REITs.

2. Retail real estate investment trusts

These are REITs that invest in retail properties such as shopping malls, grocery stores, and supermarkets. These REITs, on the other hand, are not actively involved in the operation of these retail stores; instead, they just lease the space to retail tenants.

3. Real estate investment trusts (REITs)

Residential real estate investment trusts (REITs) own and run residential properties such as apartment complexes and gated communities. This is one of the most potential sectors of growth in India, given the never-ending need for residential property.

4. REITs in the healthcare sector

These companies generally invest in and manage healthcare-related properties such as hospitals, nursing homes, retirement homes, and medical centers.

The concept of a Real Estate Investment Trust is relatively new in India, and the first set of guidelines were introduced by SEBI in 2007. After numerous modifications and clarifications from SEBI, the guidelines were later updated and notified via a notification dated September 26, 2014, with the goal of regulating investments in REITs. Despite this, India saw its first REIT after nearly five years and a slew of further revisions to the original 2014 legislation. In India, the current SEBI guidelines for REITs were.

At the moment, just three REITs have been officially registered and approved by SEBI: Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust. They all operate largely in the commercial real estate sector.

As previously stated, a REIT is a real estate investment trust that consists of a Sponsor, a Manager, and a Trustee, each of whom is vested with specific essential obligations with respect to the trust.

1. Become a sponsor

The individual who creates the REIT is known as a sponsor. They establish the REIT and transfer their property, or real estate assets, to the trust. As a result, a builder or developer who wants to raise money through a REIT usually acts as a sponsor.

Trustee No. 2

The trustee is an individual chosen by the sponsor to manage the assets on behalf of the unitholders.

3. a supervisor

The trustee hires a manager who is in charge of managing REIT assets and making investment decisions. Typically, the manager is a private firm controlled by the sponsor.

4. Owners of the units

They are the trust’s beneficiaries, and by purchasing REIT units, they become indirect owners of REIT assets. Indian residents or overseas investors can be unitholders.

5. An unbiased appraiser

A REIT selects a trustworthy independent valuer who values the REIT’s assets at regular intervals, in addition to the sponsor, manager, and trustee.

Additionally, the manager may employ auditors, registrars and transfer agents, merchant bankers, and custodians to carry out services incidental to the operation of REITs and to meet legal obligations.

A REIT’s assets might be directly owned by the REIT, or indirectly through a “special purpose vehicle” (SPV) or a holding company (Holdco) that owns such SPVs.

6. Special Purpose Vehicle (SPV)

A SPV is a firm in which either a REIT or a Holdco has or intends to own at least a 50% equity stake or interest. The SPV must spend at least 80% of its assets directly in properties and is prohibited from investing in other SPVs or engaging in any activity other than holding and developing properties, as well as any incidental activity pertaining to such holding and development.

Holdco is number seven.

A Holdco is a business or a limited liability partnership in which the REIT owns or intends to own at least a 50% equity holding or interest and has made investments in other SPV(s) that eventually own the real estate property or properties.

Other than holding the underlying SPV(s), owning real estate or properties, and any other activities related to and incidental to such holdings, the Holdco does not engage in any other activity. The aforementioned structure allows retail investors to invest in commercial real estate while generating a steady stream of passive income.

A REIT is a trust, as the name implies, and must be established in compliance with the Indian Trust Act, 1882, and duly registered under the SEBI REITs Regulations. It is critical that the trust deed of a REIT that is to be formed is properly registered, as it specifies the Trustee’s principal aim and obligations (s). It must also be guaranteed that the SEBI or any other regulatory authority takes no disciplinary action against the REIT or any linked party. The following conditions must be met in order for a corporation to qualify as a REIT:

Dividends must be paid out to investors in the amount of 90% of the profit.
A minimum of 80% of the investment must be put in properties that can generate revenue;
Only 10% of the total investment must be placed in real estate that is still under construction.

Only in April of this year, when Embassy Business Park REIT became the first REIT to be listed in India, did REITs make their debut in India. Unlike in other countries, such as the United States, where both private and public non-listed REITs are regulated, only public REITs registered with SEBI are now regulated in India.

Because REITs, like exchange traded funds (ETFs), are listed and traded on stock exchanges, buying units on the stock market is the best way to invest. As a result, if you want to invest in REITs in India, you’ll need a Demat account. The price of REIT units on stock exchanges fluctuates based on demand for units as well as the REIT’s performance, just like ETFs. SEBI has announced two key changes to the laws for investing in REITs in India to encourage investors –

I The previous criterion of INR 50,000/- for an investor to invest in REIT units has been eliminated. For investing through initial public offerings and follow-on offers, the minimum investment amount is now INR 10,000/- INR 15,000/-; and

(ii) The minimum trading lot size for REITs has been decreased from 100 to 1 unit.

1. Broadening your horizons

REITs allow you to diversify your investment portfolio by providing Real Estate exposure without the headaches of owning and managing commercial property. As part of your overall Asset Allocation Strategy, this diversification allows you to move beyond the traditional asset groups of equity, debt, and gold.

2. Initial Investment Is Minimal

As previously said, one of the major drawbacks of real estate investing is the huge ticket size, particularly in the case of commercial properties. To deliver similar portfolio diversification benefits, REITs require a significantly smaller initial investment of roughly Rs. 50,000.

3. Professional Leadership

A REIT’s properties are professionally managed. This ensures that activities run smoothly and that you don’t have to put in any effort to manage Commercial Real Estate.

4. Generating Consistent Income

REITs earn money from rental collections and are obligated to share 90% of that money to investors in the form of dividends and interest payments. REITs provide investors with consistent income in this way.

1. Options are limited.

In India, there are now only three REITs and one International REIT Fund of Fund. This severely restricts the options available to investors.

2. A Lack of Liquidity

While REITs are listed and traded on stock exchanges, the number of market participants, particularly among ordinary investors, is currently limited. As a result, profitably selling REIT investments may be difficult, especially in an emergency. As a result, the investment’s liquidity is minimal.

3. Dividends that are taxable

In the hands of the investor, any dividend or interest received from REITs is fully taxed at the applicable slab rate. As a result, taxpayers in the 30% tax bracket will see a significant amount of their dividend income go to taxes. The taxes requirements, which are explained next, are another crucial factor to consider before investing in REITs.

Furthermore, REITs must participate in at least two projects, with each project’s investment not exceeding 60% of the REIT’s total asset value. Furthermore, REITs are limited to solely investing in assets located in India.

REITs are unique, but they aren’t for everyone. Due to many variables, such as low commercial real estate rentals and the performance of commercial real estate varying by geographical area, the REIT as an instrument has not been very effective. Though much has been done to liberalize REIT investments, further regulatory incentives as well as tax benefits for investors are needed to make REITs a true success in India and attract the desired investors.

In light of the foregoing, the government must expedite taxation and other regulatory modifications and reforms in order to encourage REITS in India.

Is Embassy REIT a good investment?

The gradual recovery of many industries in the economy, including real estate, is likely to be impacted by the second Covid-19 wave. Despite the fact that the commercial category, notably office space, remained resilient in terms of occupancy during the challenging period of the previous year, the continued local lockdowns may have a short-term impact on leasing operations. Office players with properties in prime locations, on the other hand, may be able to resist the problems better. Embassy REIT is one of many office players that is well positioned to weather the short-term storm.

When the country was in complete lockdown for a short time and subsequently in partial lockdown for a few months last year, Embassy not only had occupancy above 90% but also had strong rental collections. The REIT had an occupancy rate of 89 percent and a rental collection rate of 99 percent in the March quarter of FY21. Despite the fact that several states, including Karnataka, have implemented local control measures, this is still the case. Some of the important variables that contributed to the REIT’s profitability were a broad client base, properties in desirable locations, and a healthy balance sheet with a comfortable net debt position (0.35 times net debt to equity ratio).

Embassy REIT could thus be a good alternative investment route for long-term investors with a risk appetite, given its resiliency. It is available in stock markets in multiples of 200 units. The REIT has dispersed its shares.

Is REIT debt or equity?

REITs, on the other hand, are well-regulated investments. These are required to invest at least 80% of their funds in finished, revenue-generating projects. Furthermore, a REIT’s rental income must be distributed to its unitholders at least 90% of the time. That isn’t to suggest they’re without risk. REIT income is based on rental income, which might suffer during periods of economic recession. Rents for REIT properties may be affected by the oversupply of commercial real estate. Then there’s the possibility that, as a result of a pandemic, a hybrid WFH+Office paradigm will become the norm in the future. This, too, has the potential to affect rental yields.

The product is a hybrid vehicle that combines the benefits of both equity and financing. How?

Because it must share 90 percent of its net distributable revenue, it resembles a debt product. It’s also similar to equities in that it’s listed/traded on exchanges, and its price is determined by demand-supply, market perception, and other factors.

As a result, it’s a bet on both regular income and capital growth. However, there should be more of the former and less of the latter.

As a result, your return expectations should be comparable to those of debt instruments. There’s a chance that an income-generating debt product could also generate some capital gains in the long run. Additionally, future rental hikes, increased occupancy of vacant parts, and the addition of additional properties to the portfolio can all boost your REIT earnings (as apercent of portfolio is allowed in under-construction projects).

REITs should be viewed through the lens of consistent income creation and the possibility for moderate long-term capital appreciation. So, rather than using them as a proxy for equity, think of them as an asset that can outperform debt instruments over time. REITs allow you to diversify your investing portfolio by adding a new alternative asset.

So, if you have the necessary risk appetite and want to add commercial real estate to your long-term investing portfolio, REITs can be considered in tiny dosages for the time being. Also, if more REITs/InvITs become available over time, it’s a good idea to diversify among 2-3 of them.

In India, the market is still maturing. Once it does, it may be possible to invest 10-15% of one’s debt portfolio in REITs.

Note: In my opinion, senior persons seeking a steady income should avoid quasi-debt-quasi-equity instruments such as REITs. It’s advisable for them to remain with tried-and-true fixed-income products. If they must invest in REITs, they should do so as a portfolio diversifier rather than as a fundamental asset.

Do REITs pay dividends?

A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.

All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.

What are REITs in India?

REITs (Real Estate Investment Trusts) are rapidly gaining traction in the Indian economy and real estate sector. REITs are corporations that own, operate, or finance income-producing commercial real estate and are regulated by SEBI (from the Indian perspective). REITs allow many investors to earn dividends from their interests in office properties by pooling their cash. This is accomplished without the investors having to purchase, manage, or finance any real estate.

We take a look at some of the most recent REIT deals and investments in the Indian market. We’ll also assess these organizations’ performance over the course of the year.