The Complete Guide to Investing in Real estate investment trusts (REITs) in India

Real estate investment trusts (REITs) have become increasingly popular in India as a way for investors to gain exposure to the real estate market without actually owning property. REITs are investment vehicles that own, manage, and operate income-producing real estate properties such as apartments, hotels, offices, and retail spaces. They are designed to provide investors with a regular stream of income from rental income, as well as the potential for capital appreciation as the value of the properties held by the REIT increases.

In India, REITs are still a relatively new concept and the first REIT in India was launched in 2019. However, since their inception, they have become an attractive investment option for both institutional and individual investors, providing them with access to professionally managed real estate assets with high income potential.

How do REITs work in India?

REITs in India are regulated by the Securities and Exchange Board of India (SEBI) and operate under the same principles as REITs in other countries. In order to qualify as a REIT in India, a trust must meet certain criteria, such as:

• A minimum of 80% of its assets must be invested in real estate assets
• At least 75% of its taxable income must be distributed to unit holders as dividends
• The trust must have a minimum of 100 unit holders

Once a REIT is established, it raises funds through an initial public offering (IPO), which allows individual and institutional investors to purchase units in the trust. These units are then traded on the stock exchange, providing liquidity for investors. The REIT then uses the funds raised to purchase and manage real estate assets, which generate rental income. This rental income is then distributed to unit holders in the form of dividends.

Why Invest in REITs in India?

There are several benefits to investing in REITs in India, including:

• Regular income: One of the key benefits of investing in REITs is the steady stream of income they provide in the form of dividends. This income is generated from the rental income received by the REIT from the properties it holds.
• Diversification: REITs provide investors with exposure to the real estate market, offering diversification benefits as real estate is typically uncorrelated to other asset classes such as stocks and bonds.
• Professional management: REITs are managed by professional real estate managers who have the expertise and experience to select, purchase, and manage real estate assets. This allows investors to benefit from their expertise and reduces the risk of investing in real estate directly.
• Liquidity: REIT units are traded on the stock exchange, providing investors with the ability to buy and sell their units easily. This allows investors to access their capital quickly if needed.
• Lower costs: Investing in REITs can be more cost-effective than investing in real estate directly as the REIT covers the costs associated with managing the properties.
• Opportunity for growth: As the value of the real estate assets held by the REIT increases, the value of the REIT units also increases, providing investors with the opportunity for capital appreciation.

What are the Disadvantages of REITs in India?

• Limited control: As an investor in a REIT, you do not have direct control over the properties or the management decisions made by the REIT. This lack of control can make it difficult for investors to have a say in the direction of the REIT and the properties it holds.
• Market fluctuations: REITs are vulnerable to market fluctuations and changes in the real estate market, which can have a significant impact on the value of the REIT units and the income generated from the properties.
• Dependence on the economy: The success of a REIT is dependent on the health of the economy, as well as the demand for rental properties. If the economy is performing poorly, demand for rental properties may decrease, leading to lower rental income and a decrease in the value of the REIT.
• Management fees: REITs charge management fees to cover the costs of managing the properties and distributing dividends to investors. These fees can eat into the income generated by the properties and reduce the overall return on investment for investors.
• Interest rate risk: REITs are sensitive to changes in interest rates, as a rise in interest rates can increase the cost of borrowing and reduce the demand for rental properties.
• Tax implications: In some countries, including the United States, REITs are subject to high tax rates, which can reduce the overall return on investment for investors.
• Limited investment options: In some countries, the number of REITs available for investment may be limited, making it difficult for investors to find a REIT that aligns with their investment goals and objectives.

How to Invest in REITs?