Investing in real estate may sound like a big deal, especially for young individuals. But, REITs (Real Estate Investment Trusts) help individuals to invest in this sector, even if it’s a part of it. REIT enables individuals to trade properties like commercial buildings, etc, like equities and make money. It is a SEBI-regulated and hence highly secure and trusted source of investing. Individuals are offered an opportunity to invest in real estate even with little money.
Let us dive deeper into this article to understand REITs in depth.
What Are REITs?
REITs, or Real Estate Investment Trusts, are companies that make investment in real estate easy and accessible without needing large capital at once. They hold the ownership of properties varying from commercial properties to shopping centres to even warehouses. With the ownership, the responsibility of managing and maintaining these properties also comes along.
REITs allow investing in such properties similar to the stock market. It was first introduced in India in 2014 and made available to retail investors in 2019, which made real estate investing more accessible to people who might not have the substantial funds needed to purchase properties independently.
Important characteristics of REITs:
- Liquidity: Since listed REITs are traded on stock exchanges, it is simple to enter and exit.
- Diversification: Risk is decreased by being exposed to a portfolio of real estate assets.
- Consistent Income: They usually pay dividends consistently.
- Regulated Structure: REITs have a regulated structure, which is governed by SEBI in India.
- Minimum Investment: The minimum investment in India has been lowered to as low as ₹10,000 to ₹15,000, but smaller amounts are also possible via funds or ETFs tracking REITs.
How Do REITs Work?
REITs have a diverse portfolio of real estate that allows investors to invest in them. They have the ownership of these properties along with the responsibility of maintaining and managing them. The retail investors may start with a smaller amount to thoroughly understand this industry.
These companies provide the option to invest in a capital-intensive industry like Real Estate with a much smaller amount and generate returns. According to SEBI, REITs are required to distribute 90% of the net distributable cash flow (NDCF) to their unit holders.
Principal Revenue Sources for REITs:
- Revenue from Commercial Property Rentals
- Capital gains from property sales, though it is not a primary revenue source in India, due to regulatory preference for long-term holdings.
- Interest income from mortgage investments is a common revenue source for REITs internationally, but such structures are not currently permitted in India.
Types of REITs and Examples in India
Based on their operational focus and underlying assets, REITs can be broadly categorized into the following types:
1. Equity
- Own and run real estate that generates revenue, such as hotels, malls, and office buildings.
- Make the majority of your income from rent.
- It is the most prevalent kind in India
2. Mortgage
- Make money by receiving interest.
- More common in the United States; less common in India.
3. Hybrid
- Combine the features of mortgage and equity REITs.
- Make money from your mortgage interest as well as your rental income.
- They are uncommon in India, but they provide a variety of revenue streams.
| REIT Name | Sponsor | Listed Year | Portfolio Type | Type of REIT |
| Embassy Office Parks REIT | Embassy Group + Blackstone | 2019 | Commercial office spaces | Equity |
| Mindspace Business Parks REIT | K Raheja Corp | 2020 | Office parks and IT SEZs | Equity |
| Brookfield India REIT | Brookfield Asset Mgmt. | 2021 | Commercial real estate | Equity |
| Nexus Select Trust REIT | Blackstone-backed | 2023 | Retail malls (first of its kind) | Equity |
Should You Invest in Indian REITs?
Let us review some pros and cons to decide if investing in them is worth it or not.
Pros for Investing in Indian REITs
- Regular Dividend Income
REITs must distribute at least 90% of their net distributable cash flow, giving investors regular payouts every quarter or every six months. - Low Bar for Investment
In contrast to purchasing real estate, REITs enable investors to begin with as little as ₹10,000 to ₹15,000, making them affordable for small investors and young professionals. - Openness and Liquidity
Compared to real estate, REITs offer better liquidity because their units can be bought and sold like shares on Indian stock exchanges (NSE/BSE). - Portfolio Diversification
Through REITs, you can access commercial real estate, a distinct asset class that lowers overall portfolio risk, particularly in volatile equity markets.
Cons for Investing in Indian REITs
- Sensitivity to Interest Rates
The yield from REITs may appear less alluring when interest rates rise in comparison to bonds or FDs, which could drive down REIT prices. - The volatility of the market
Similar to stocks, REIT prices change every day in response to real estate trends, market sentiment, and the state of the economy. Therefore, capital growth is not assured. - Risk of Concentration
Commercial office space is currently the primary focus of the majority of Indian REITs. Rental income and distributions may be impacted if the office leasing market slows down, as was the case during COVID-19. - Dividend Taxation
Under taxation, REIT distributions are taxed based on their components, interest and rental income are taxed as per the slab, while capital returns can be tax-exempt.
Bottomline
The conclusion can be drawn that REITs are great for equity trading of real estate with less money, yet generating returns. Despite the risks they carry, like market reliance and interest rate sensitivity, their advantages in terms of affordability, diversification, and passive income make them a valuable addition to a well-rounded investment portfolio. They offer a contemporary option that is in line with international investment trends for Indian investors looking for a regulated, liquid, and tax-transparent entry into commercial real estate.
Without actually owning any real estate, REITs give Indian investors a convenient and liquid way to profit from real estate growth and generate a consistent income.
Written by: Tanya Kumari
