Decoding The Real Estate Investment Trusts
REITs are a collection/stack of real estate securities just like mutual funds are a collection of debt/equity securities.
India’s first REITs have been successfully traded, and a lot of regular investors want a piece of the pie. The thing that stops them is not knowing what such an investment may entail. But times are rapidly changing and so is the investment outlook. Hence, it is more relevant now than ever to decode the mystery behind REITs. Let’s begin.
What are REITs?
REITs are a collection/stack of real estate securities just like mutual funds are a collection of debt/equity securities. They invest in commercial real estate properties and the investors can buy units of the fund via the stock market. For the longest time, the cost of immovable properties has been an entry barrier for many longing investors who wanted to invest in RE but not live the house they bought. Now, if capital appreciation via real estate is what interests you, then REITs are just your thing. Investors are also wary of committing to a single property for long-term, at times, which is a problem REITs curb by allowing you to diversify your investment into real estate with a flexible window.
REITs are regulated by the Securities and Exchange Board of India (SEBI). The profits earned by the fund house via capital appreciation of the real estate property are then distributed amongst the investors in the form of dividends.
Assume that an REIT IPO has been launched and listed on both NSE and BSE. The units are priced at Rs 500 and the minimum application had to be of 1000 units, i.e. ~Rs 5 Lakh. Now, realistically speaking, to invest in a house of your choice at Rs 5 Lakh is almost impossible. This is the window that an REIT provides. But the thing to keep in mind is that there is an entry cap about the number of minimum units to be bought.
Advantages of REITs
Liquidity- Just like you can trade your stock unit in the market, the same can be done for an REIT too. So, if you decide to pull out of real estate, this idea is much simpler than having to sell a house.
Affordability- REITs do bring down the entry window into real estate investments and that too without the hassle of having to maintain a property that you are not even staying in.
Dividends- As per SEBI, the fund houses are supposed to share 90% of the profits earned via appreciation or rents with the investors.
Diversification- REITs make it possible to diversify your investment portfolio and enter a sector which was otherwise difficult to enter.
Having said the above, many investors may feel wary of REITs because there is no trend line or graph to refer to when it comes to the kind of returns, they might gather. However, if the international success of REITs is anything to go by, REITs in India will open new doors for successful and collaborative real estate investments.