Are Real Estate Investment Trusts (REITs) Worth Your Money?
Created on 19 Feb 2021
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Are you worried about taking a loan to purchase real estate? Or are you facing the trouble of finding the right tenant for your property? Here's a solution for you: The Real Estate Investment Trust (REIT).
Let's understand what REIT is and find out why it can be the perfect investment tool for you.
What is REIT?
REIT is a company that owns, operates, or finances real estate to generate income. In simple words, REITs are like Mutual Funds which invest in real estate. This way, the investors can get good and stable returns in the form of dividends without bearing the stress to own or manage the properties.
People often confuse REIT with Real Estate Developers. But contrary to popular belief, they are NOT the same!! A REIT does not develop real estate properties to resell them. Instead, it buys properties to operate them as part of its investment portfolio.
Types of REIT
- Equity REITs: These REITs own and manage income-generating commercial properties. They earn their revenue mainly from rent.
- Mortgage REITs: They lend money to the real estate owners or developers directly or indirectly. They earn their profits through the interest accrued on the money they lend.
- Hybrid REITs: These are the mixture of Equity and Debt REITs. They hold property mortgages, besides owning and operating them.
- Private REITs: They are like Private Limited Companies, but they are not registered with SEBI and nor are they traded on the stock exchange. They are relatively less regulated.
- Publicly Traded REITs: They are registered with SEBI and are listed on stock exchanges. They are considered the most liquid of all.
- Public Non-Traded REITs: They are registered with SEBI but not traded on a stock exchange. Although they are less liquid, they are relatively safer as they do not have market risk.
Benefits of REIT
- Liquidity: Unlike physical real estate, REITs are bought and sold on stock markets like Brookfield India, which got listed on 17th February 2021. It makes them highly liquid and solves the problem of finding the buyers and sellers of the stock.
- Steady Returns without trouble: As mentioned earlier, REITs provide a steady income in the form of dividends without the hassle of looking for tenants. Besides this, they also yield capital appreciation like real estate.
- Low investment: The best advantage of REITs is the amount of investment required. While a 2 BHK flat in Mumbai can cost over Rs 1 Crore, there is no such constraint in REITs. You can invest as LOW as Rs 500 to buy their shares.
- Transparency: REITs are regulated by SEBI and have to do all the necessary filings with them. So all the financial information about REITs is actually available to the public. We can use it to analyze them and decide whether to invest or not.
Limitations of REIT
- Low Growth: REITs distribute up to 90% of the income in the form of dividends. Only 10% is re-invested. Hence, capital appreciation is slow. So, they are best suited to be dividend-paying stocks.
- Market Risk: Just like other stocks, listed REITs are subject to market risk. If you do not want to take the risk, then unlisted or private REITs can be a better investment.
- No Tax Incentive: The dividends earned from REIT companies are subjected to taxation.
- Less Popularity: Only 3 REITs are being traded on NSE and BSE as of now. So, they have not become popular yet, due to which their returns from the share market can be low in the short term.
Tips to Assess REITs
Just like doing the fundamental analysis of shares, the following are a few tips to analyze whether REITs are a good investment option for you or not:
- Returns: The first and foremost thing an investor looks for is returns. REITs are no different. One should analyze and compare the returns in the form of dividends and capital appreciation.
- Investment Tenure: If you want to stay invested for the long term, you can buy shares of unlisted REITs. But if you are a trader, you can go for the listed ones, as they are highly liquid.
- Performance: The REIT should have good functioning, besides having some experience.
In case of analysis not being possible, you can also invest in mutual funds and ETFs which invest in REITs. It will help you to get professional assistance.
How to Launch Your Own REIT?
Did you find the concept of REIT interesting? If yes, why only be an investor when you can be your own boss? Here is how you can achieve your dream to be the promoter of a REIT:
- Register your company as trust or a business corporation.
- Issue transferable equity shares.
- Appoint trustees or board of directors.
- You must have a minimum of 100 shareholders.
- Have at least 75% of investments in real estate.
- Earn at least 75% of the income from mortgage interest or rents.
- Pay at least 90% of the taxable income as a dividend.
REITs pool the money to invest in real estate or lend money, like Mutual Funds. They let investors own a part of a property with low investment. They are categorized as Equity or Debt REITs and Listed or Unlisted REITs.
They offer a steady income without requiring much investment. Besides this, the listed ones are highly liquid and transparent. But they have fewer growth prospects besides being risky and don't offer tax incentives. They are also not very popular yet.
To analyze REITs, you should compare their yield and performance and your preferred investment tenure to decide accordingly. If not possible, take the consultancy services of a financial advisor.
If you find this article interesting, you can also launch your own REIT by fulfilling the conditions mentioned above. In the end, REITs can be a lucrative investment option if done cautiously as, of course, "The best investment on Earth is EARTH."
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