Real estate investment trusts (REITs) are organisations/companies that finance or own income-generating real estate in the range of property verticals. They offer you the potential to own valuable property or real estate, endow the opportunity to avail dividend-based overall returns and income, and assist communities to thrive, expand, and revitalise.
With REITs, you can invest in real estate portfolios the same way you invest in other investment categories or industries by buying individual stocks, ETFs (exchange-traded funds) or mutual funds. The REIT stockholders earn a specific income share produced via real estate investment without the need for going anywhere out to purchase, manage or fund property.
The US was the first nation to introduce REITs in the year 1960 through the Act – Cigar Excise Tax Extension and the very first REIT listed was in 1965 on the New York Stock Exchange. However, in India, REIT was first introduced in the year 2007 by the SEBI (Securities & Exchange Board of India). As per the Indian context, to be eligible as REITs, the companies must meet a specific number of parameters and requirements. Such investments are registered with the SEBI. Therefore, it is a must for the REIT units to be listed on recognised exchanges with nationwide trading terminals.
REITs are modelled on the same lines as mutual funds where you can invest a portion of your investible to own a part of a property/real estate instead of the whole property, which might be not affordable for you as a retail investor. In India, REITs consist of global players that stringently adhere to global practices and standards in asset management.
The two main forms of REITs are equity REITs and mortgage REITs. Mortgage REITs provide funding for real estate assets, which may be either commercial or residential. They generate income from the investment in securities in the form of mortgages. Equity funds REITs, on the other hand, involve properties like offices, condominiums, shopping centres, etc., that draw the maximum of their earnings through rent.
Advantages of REITs in India
In India, REITs assure to provide a regular flow of income via dividends. They are mandated to disseminate 90 per cent of their gains/profits in the form of dividends to you. Such instruments considerably are less volatile as compared to other financial instruments like stocks because the regulation ensures to maintain 80 per cent of REIT listings in rent-generating assets.
Additionally, the historical performance and diversification features available in REITs offer various benefits to you not found in the companies of other industry sectors. Such benefits are basically one of the reasons for the rising popularity of REITs in India over the last few years.
Challenges of REITs in India
Like any asset class, REITs also come with a few challenges. These challenges involve limited knowledge regarding the product and inadequate evidence on returns. As REITs are listed just like company stocks on BSE and NSE, equity market trends tend to impact the return expectation.
As REITs manage and own high-value properties, they are considered one of the most expensive investment avenues in the market. If you are one of those with substantial capital, then you may take exposure to REITs. By adding a bit of your investible to REITs, you may generate good long terms returns, and use this investment as a hedge against inflation.