Date: August 20, 2023 Author: Team Piramal Realty
When an individual builds an investment portfolio, every advisor worth their salt will suggest putting the money in various assets to spread the risk and ensure higher returns.
One such popular investment in India is real estate due to its hedge against inflation and significant capital appreciation. But it also has its own challenges – no geographical diversification, considerable investment outflow, and limited liquidity.
These real estate investment challenges can be overcome by investing in Real Estate Investment Trusts in India (REITs).
What are REITs in India?
The Real Estate Investment Trusts in India manage and/or own immovable assets – either the properties or their mortgages –for a steady source of income as leases and rents, along with capital appreciation.
Like units in mutual funds, REIT investors can purchase units and invest in a portfolio of diverse, income-producing properties. The REITs pool the investors’ money in the owned/managed real estate properties and distribute the income among the investors proportional to the units owned.
REITs can be traded on the exchange as per the REIT share price once they are listed. REIT investing allows higher diversification, ensures lower risk, and has the potential for better returns. As part of an investment portfolio, the capital appreciation and dividend income from REIT real estate create a perfect balance against stock market volatility.
How to Invest in REITs in India?
REITs are listed and traded on the stock exchange. Therefore, a Demat account is needed for REIT investing.
REITs investment in India can be made through:
- Direct stocks:
Investing through the stocks of the listed REITs is a direct way of investing in them. - Exchange-Traded Funds or ETFs:
To benefit from the indirect ownership of the properties and the diversification, invest in REITs as ETFs. - Mutual funds:
To diversify your investments, invest in a REIT through mutual funds via a mutual fund company.
As per vide notification dated 30th July 2021, the Securities and Exchange Board of India (SEBI) changed the minimum investment requirement of ₹50,000 worth of units. Additionally, the minimum lot size requirement of 100 units of REIT funds in India was brought down to 1 unit. Accordingly, if you are investing directly through the stock market, there is no minimum investment requirement. However, for investing through Initial Public Offerings (IPOs) and Follow-on Public Offerings (FPOs), the minimum investment requirement is between ₹10,000-₹15,000.
Factors To Consider While Investing in REITs
Property Location
Location is the most crucial element in real estate investing profitability. Residential property assessments heavily consider the status of the community, green space, scenic vistas, and proximity to amenities. For valuing commercial real estate, accessibility to markets, warehouses, transportation hubs, motorways, and tax-exempt regions is crucial.
Valuation of the Property
Real estate valuation is essential for financing the purchase as well as listing price, investment research, insurance, and taxation, all of which rely on it.
Investment Purpose
Lack of clarity regarding the aim may result in unanticipated outcomes, including financial distress, especially if the investment is mortgaged, given the low liquidity and high value of the real estate.
Expected Cash Flows and Profit Opportunities
Cash flow is the amount of money that remains after expenses. A strong rate of return on an investment property depends on having a positive cash flow.
Be Careful with Leverage
Loans are convenient, but they may come at a big cost. In exchange for today’s utility at a cost of interest spread over many years, you pledge your future earnings. Be sure you understand how to handle loans of this nature and avoid high levels of debt or what they call over-leverage. In times of challenging market conditions, even real estate specialists face challenges from excessive leverage, and the lack of liquidity combined with significant debt commitments can cause real estate ventures to fail.
Conclusion
With more and more investors looking to diversify their investments in real estate, REITs serve as the perfect avenue for a diversified and secure investment. However, just like any investment, REITs also require detailed research and due diligence before investing.
Frequently Asked Questions
As of 31st March 2021, India has 4 registered REITs. Of these, only 3 are listed, which are:
- Mindspace Business Park REITs
- Brookfield India Real Estate Trust
- Embassy Office Parks REITs
- Cheaper alternative to property transactions
- Easy entry and exit from real estate investments
- Automatic price determination system
- Property and geographical diversification
- Less risky than a direct investment in real estate
- Higher liquidity than direct property investments
- Asset portfolio of the REIT or the Special Purpose Vehicle (SPV)
- Past performance of the stocks
- Historical profits of the REIT
- Occupancy Ratio of the properties
- Sectoral diversification of the properties and tenant quality
- Weighted Average Lease Expiry
- Geographical diversification of properties
- Yield from dividends
On stock exchanges, REITs are listed and traded, and investors can purchase units through a Demat account. To take advantage of new REIT launches, investors can also look at IPOs
The minimum amount to invest in REIT India after SEBI’s notification on July 30th, 2021, ranges from INR 10,000 to INR 15,000. In the same SEBI regulation, the minimum lot size for REITs was also decreased from 100 units to 1 unit.
Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.
