An investment instrument that is resilient to market forces, acts as a hedge against inflation, and can ensure long-term passive income These are just some of the many advantages that investing in real estate can provide. However, investing in real estate is often equated with allocating huge amounts of funds, not to mention the daunting tasks of navigating the tricky terrains of the real estate industry.
From conducting thorough research on market trends, location, developers, etc. to narrowing down the right property best suited to your needs to actually managing the property, the challenges can be unnerving, especially for a novice investor. So what should you do if you want to enjoy all the benefits of investing in this sophisticated asset class but bypass all the obstacles? This is where the Real Estate Investment Trust comes in.
What is Real Estate Investment Trust (REIT) ?
To put it briefly, a REIT is an investment instrument wherein a company or trust owns, operates, and finances a real estate asset that generates income. While investing in real estate can often prove to be a tricky business, REIT allows you to invest in large-scale assets without having to come up with large sums of money associated with them. Much like mutual funds, REITs pool capital from multiple people, allowing them to enjoy steady dividends without ever having to worry about the associated upkeep of the properties.
So essentially, REITs are companies that own high-value real estate properties, lease them out, and distribute a significant portion of the collected rent amongst the investors. REITs in general trade in a variety of real estate assets like residential real estate, warehouses, data centres, retail assets, etc. To qualify for the tax benefits of being a REIT, it is necessary to distribute 90 percent of the collected rent amongst the investors.
Just like stocks, REITs are traded on major security exchanges, where they can be bought and sold, thus granting liquidity to investors, an aspect that is often missed when directly investing in real estate. Furthermore, with REITs as your trusted investment partner, you can rest assured that your investment is being managed by experienced professionals, thus minimising any risk involved.
While investing with a REIT has been a popular investment technique globally, it is a relatively new concept in India. It was, after all, only a decade ago, in 2014, that the Securities and Exchange Board of India (SEBI) finally laid down the framework for establishing and operating REITs. Today, there are three REITs listed in India: Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust, with four more expected to be established by the end of 2025.
The types of REITs operating in India currently are:
Equity REITs: These REITs are those that buy, sell, manage, and operate various types of real estate assets like residential space, commercial space, hotels, retail spaces, etc. Whatever yield is generated through the sale and rent of the properties is distributed amongst the investors.
Mortgage REITs: Also known as mREITS, these entities loan out money to those interested in purchasing real estate assets or buying existing mortgages. Modelled on debt mutual funds, their source of income is the interest received on these loans.
Retail REITs: These REITs invest in different retail spaces, like shopping malls, grocery stores, hypermarkets, supermarkets, etc. Their income source depends on the performance of the retailer, and they do not manage these spaces.
Residential REITs: These REITs invest in residential spaces such as apartments, gated complexes, etc. Since the demand for these spaces has been on the rise in the last few years, they present a good investment opportunity.
Healthcare REITs: These are a specialised type of REIT that primarily invests in and manages healthcare-related real estate such as hospitals, medical office buildings, senior living facilities (including assisted living and skilled nursing facilities), etc.
Office REITs: These REITs focus on office properties and earn through rental income.
To sum it up, REITs are a hassle-free way to invest in real estate. With various REIT options in India, they provide an easy way to diversify your portfolio. As REITs gain traction, they’re transforming real estate investment by offering liquidity, and professional management. Whether you’re new to investing or an experienced pro, REITs can be your key to financial growth and stability.