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April 10, 2023REIT or real estate investment trust is a relatively new investment product that was approved by the SM regulation of SEBI. As the name suggests it is a real estate investment product that was conceptualized in the US way back in the 1960s. REITs allow small investors to take part ownership of large ticket-sized real estate properties like office complexes, malls, supermarkets, and other commercial/residential properties.
REITs trade like normal shares offering good liquidity as they are regulated, they offer good protection to investors from scams and frauds prevalent in India’s real estate sector. REITs as an investment class give a good income yield because most of their earnings are from rents that they pass on. Let us understand what are the rules for REITs:
i) distribute 90% of their income as dividends
ii) 80% of investment in income properties and
iii) not more than 10% in under-constructed properties.
Currently, there are only three REITs in India:
a) Embassy
b) Mindspace
c) Brookfield
These have given good returns over the last few years and offer a good yield. As the market matures, we can hope to see different types of REITs like the USA which gives exposure to different RE sub-segments like residential, retail, senior citizen housing, hospitals, etc.
Investing in REITs requires due diligence just like stocks and you have to understand the fundamentals like the quality of properties and tenants, years of lease term remaining, occupancy, diversification, etc. You should also check the history of the sponsor like Embassy, Brookfield. Finally, the most important thing for investors is the YIELD.
So investors who want to diversify their asset allocation to real estate given the good fundamentals can put money here instead of a large lump sum in a shop or office property. The downsides are complex taxation and cumbersome accounting, a steady source of income – do not expect high growth, and using leverage is not an option in contrast to getting a cheap home loan.