What REIT Is And How It Works?

Know what REIT is and how it works?

In today’s time of demand, it is very difficult for people to save money for investment, and if you want to invest in real estate i.e. any property, then you will be shocked to hear the price of land. In such a situation, REIT is a way which gives you the advantage of taking advantage of the returns given by real estate even without buying it for a minimum amount of money. The concept of REIT is not so popular in India yet and many people are not even aware of it. In such a situation, in today’s article we will cover “What is REIT” and the questions related to it.

What is a REIT?

REIT means “Real Estate Investment Trust”. This is a means of investment in which profits are earned by investing in real estate related mediums. It was first started in India in 2007, through which investors are able to invest in any property without buying it. Like the stock market, REIT is also regulated by SEBI. In this, returns are mainly earned by investing or renting commercial properties like offices, shopping malls, hotels.

If you are also among those people who want to invest in such an option which provides regular income along with diversifying your portfolio, then REIT can be a good option for you. But here it is also important to keep in mind that like every investment option, REIT also has its own risks and risks, and it is very important to have complete information and research before investing in them.

How do REITs work?

From the setup of REIT till the common people invest in it, the following steps are followed:

The functioning and structure of REIT is similar to that of mutual fund. The concept of REIT is quite new in India, the first guideline of which was issued by SEBI in 2007. The current guidelines are as per the approval of 2014. The entity that wants to start a REIT must be established as a company or corporation whose main business should be in real estate. It includes sponsor, fund manager and trustee. To establish a REIT, first a real estate company appoints a trustee acting as a sponsor. This trustee controls all real estate assets. The trustee appoints a manager who invests and manages real estate properties on behalf of the trustee. After this, REIT can apply to be registered as per its asset class. People can invest in it after it is registered or listed in the stock exchange. To start a REIT:

• The total asset value of the company should be at least Rs 500 crore.
• 90% of its taxable income has to be distributed among investors in the form of dividend.
• 80% investment should be in income yielding properties.
• 20% can be invested in other assets like stocks, bonds etc.
• Only up to 10% of these investments can be made in under construction projects.

There are mainly three REITs in India at present:

1. Brookfield India Real Estate Trust
2. Embassy Office Parks REIT
3. Mindspace Business Parks REIT

How many types of REITs are there?

According to the type of investment, REIT is mainly divided into 6 parts:

Equity REITs – This is the most popular type of REIT. In this, maximum investment is made in properties and real estate from where income is earned in the form of rent.

Mortgage REITs: Like Equity REITs, these REITs also invest in real estate, the only difference is that their income comes in the form of EMI and interest on the properties sold instead of rent.

Hybrid REITs: Their income includes both rental and interest profits.

Private REITs: A limited number of investors are involved in these and they work like private placement. It is neither registered under SEBI nor listed in any stock exchange.

Publicly Traded REITs – As the name suggests, they are registered by SEBI and listed in the stock exchange. Like stocks, people can buy and sell their shares from the exchange.

Public but not listed REITs: Such trusts are registered with SEBI but are not listed on the stock exchange. These are less traded than listed REITs and also have less volatility.

How to invest in REIT?

Investment in REIT can be done in the following ways:

During IPO: Like the stock market, one can list and raise funds in REIT through IPO and FPO. During IPO, investors can invest in REIT for which the same steps are followed to participate in the IPO of any company. Before 2021, the minimum investment amount in REIT was Rs 50,000 but later SEBI issued a circular and increased it from Rs 10,000 to Rs 15,000. Apart from this, the minimum purchase limit was also reduced from 100 to 1 unit.

Through Stock Exchange: As already mentioned, after IPO, REITs get listed in the stock exchange and trade like any common stock. From here also investors can easily buy units of REIT.

Through Mutual Fund: Apart from the two methods mentioned above, investors can also invest in REIT through mutual funds. At present, very few mutual fund houses offer this service which is likely to increase in the future.
What is the return on REIT investment? – How much return is received in investment?

The returns received in REIT depend on many factors such as performance of the properties invested, interest on EMI, property rent etc. At present the average yield of listed REITs in India is between 6-8% but this is not fixed in any way. It is also important to note here that it also depends on the economy and investor sentiment.

Benefits of investing in REIT

Diversification: Through REITs we can diversify our investment portfolio. This is a different type of investment instrument which earns profits by investing in many types of properties including office buildings, shopping malls, apartments and warehouses etc.

Stable Income: REITs usually give stable and regular income to their investors in the form of dividends. This income supports investors financially in the form of a regular cash flow.

Liquidity: As already mentioned, REITs are listed on the stock exchange. Being listed on the exchange, it is seen as a liquid investment option through which investors can easily buy and sell REIT units without any hassle.

Professional Management: REITs are managed by professional fund managers who are experts in their field. Due to their efficiency, REIT has the ability to give a good return compared to other investment instruments.

Tax Benefits – Rental income from REITs and interest etc. which is due to investment in property, is tax free.

Low Investment Requirement: Before 2014, investment in REITs could be done with a minimum of Rs 50,000. But later this limit was changed to between Rs 5000 and Rs 15000. In this way any common citizen can invest in real estate in a very small amount.

Disadvantages of investing in REIT

Like every investment vehicle, investing in REITs has some disadvantages. The losses incurred by investing in REITs are explained below.

Market risk: Like any other investment, REIT is also not free from market risk. The value of your investment varies depending on the performance of the rail estate market.

Interest rate risk: The returns of REITs can be affected by changes in the ongoing loan and investment interest in the economy. If interest rates rise, it may become expensive to buy REIT units, which reduces the income of the properties in which the REIT fund has invested.

Inflation risk: Inflation means inflation. Due to this the value of returns given by REIT reduces. If the rental income received does not match the rate of inflation, then people may turn to other means of investment.

Management risk: The funds of REITs are managed by a team of professionals. The fund manager takes all the decisions related to investing the fund. If this management takes any wrong decision and it affects the returns of the REIT.

Limited control: When we invest in REIT, we do not have any control over the asset being invested. All this is controlled by the fund manager and we also have to depend only on the management.

Conclusion

In short we can say that REITs are trusts like mutual funds which earn returns through real estate instead of investing in stocks and other assets. It gives an opportunity to the common man who is unable to invest in any property due to low income, to avail the profits from real estate. If we look at it, from diversifying your portfolio to getting regular income, REIT is a great means of investment.