What is the affordable form of investing in real estate?

What are REITs and is it safe to invest in Indian REITs? – Vinod Goud, Saroornagar, Telangana

REIT also known as Real Estate Investment Trust is a company that owns or manages real estate. Returns earned by REITs are shared as dividends among shareholders. REITs are another form of real estate investment, and they are a desirable investment for investors who cannot afford to invest large amounts of funds in real estate, including land and buildings. . Only wealthy investors could afford to naturally invest in real estate. With the advent of REITs, hoi polloi quickly realized the new investment opportunities.

Today, REITs have enabled small investors and the bourgeoisie with less resources and capital to invest in real estate. REITs and mutual funds are similar in that they allow a variety of investors to pool their money and invest in professionally managed assets. The only difference between REITs and mutual funds is the investment type of the underlying asset. In the case of REITs, the underlying assets are mostly real estate or loans secured by real estate, while the underlying assets of mutual funds are usually stocks, debt, gold or a combination of these asset classes.

Similar to mutual funds that hold a portfolio of stocks, REITs own and manage a portfolio of rental-generating commercial properties. The Securities and Exchange Board of India (SEBI) closely regulates all REITs listed and registered in India. Similar to exchange-traded funds (ETFs), investors can buy REIT shares on the stock market because REITs are listed and traded on exchanges.

An investor needs a Demat account to buy/sell/trade REITs. Investors who want exposure to real estate can invest in REITs indirectly through mutual funds, as some mutual funds invest in REITs. One can also invest in international REITs through a few Indian mutual funds. REITs generate a steady stream of income for investors with little risk.

Unlisted REITs will present a higher risk. In terms of liquidity, investing in publicly traded REITs provides greater liquidity. Affordability is one of the main advantages of investing in REITs because one can buy a unit of a REIT. Most REIT income is rental income from commercial real estate, such as offices and shopping malls.

However, REITs must distribute at least 90% of the net rental income of their portfolio as dividend or interest income to their shareholders. The price of a REIT share keeps changing like a capital share, depending on performance and demand. Similar to stocks and mutual funds, REITs generate two streams of income for investors: dividend income and appreciation in REIT unit value.

One can invest in REITs through the primary market whenever a REIT brings its IPOs. The Indian REIT market is still nascent and investors have limited choice in choosing REIT shares. If you physically buy properties limited to a city or town, your investments are in land and buildings. While investing in REITs will expose you to investments in multiple cities and towns.

Capital gains realized on the sale of Indian REIT shares are subject to Short Term Capital Gains Tax (STCG) at 15% if held for less than one year. Investments held for one year are subject to Long Term Capital Gains Tax (LTCG) at the rate of 10% if the income exceeds Rs one lakh. The taxation of dividend income received from REITs is subject to obtaining special tax relief from the government. If the REIT has not obtained a special tax benefit, there is no tax on the REIT’s dividends. Income tax on REIT dividends is taxable in the hands of the investor if the particular REIT has obtained special tax relief from the government.

During Covid-19, REITs suffered from vacancy losses. The work-from-home phenomenon has also changed the fortunes of REITs. As a result, hundreds of thousands of square meters of commercial real estate remained unoccupied by corporate tenants. This risk has strongly affected the income of REITs.

Factors such as vacancy risk, portfolio occupancy percentage, past performance and dividend yield should be analyzed and researched before investing in REITs. Before investing your hard-earned money in new asset classes like REITs, seek the help of a licensed financial adviser or the help of a CFP or chartered accountant if you are a novice investor.

(The author is a SEBI Accredited Research Analyst. An alumnus of the Indian Institute of Foreign Trade (IIFT), he has held senior positions at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc.)

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