What is Real Estate Investment Trust (REIT)?

India offers many investment options. Investors have many options, including financial instruments such as equity, bonds, and fixed deposits, and physical assets such as real estate, gold, and other tangible assets. However, real estate is the most popular choice for investors. According to the Reserve Bank of India report, 77% of Indian households have real estate. The limited liquidity of real estate investments is a persistent problem.

Real Estate Investment Trust, or REIT, is the solution to many of the problems associated with real estate investment. A REIT is a company which develops, finances or owns revenue-generating real property.

What's a REIT?

When asked what is a REIT? The simple answer is that it is a company that pooled funds from many individuals to invest in income-generating properties. REITs can be compared to mutual funds. They allow investors to earn and invest in real estate without having to manage or buy it. It is difficult to invest in Indian real estate. You will need to do extensive research if you wish to purchase rent-generating real property. The structure and rules that govern REITs makes them transparent and easily liquid. As REIT investments are traded on exchanges like stocks, they can be liquidated easily. The rules for REITs stipulate that 90% of income must be paid out to investors in dividends and 10% can be retained by companies. REITs often invest in commercial real property and lease it out. The income is divided among investors. Mortgage REITs do not own real estate but finance projects. Dividends are paid out from the interest earned.

Types and REIT's

- Equity REITs - These are the most popular REITs. These REITs manage and own real estate. Equity REITs' primary source of income is rental income.

- Mortgage REITs - These REITs lend money through loans and mortgages to real estate developers. The REIT's income is determined by the interest the operator pays on the funds. The income for REITs is the difference between the interest REIT pays lenders and the interest the developer pays. Variations in the interest rate can affect the income of mortgage REITs.

- Hybrid REITs are a middle ground between mortgage REITs and equity REITs. Hybrid REITs typically use a portion of the accumulated funds to own real estate, while the rest is used to mortgage or loan developers.

How do you invest in REITs?

REITs can be listed on exchanges. One can also buy units of REITs just like shares in a publicly traded company. Investors can buy shares in REIT mutual funds and exchange-traded funds, as well as publicly traded REITs.

Is REIT investing a good idea?

India is an emerging market for REITs. In India, the first REIT was launched in 2019. However, REITs in western countries exist for more than 60 years. Is it sensible to invest in REITs, as this is a new concept for India. There are many unique benefits to REITs.

Minimum capital requirements: India's real estate is expensive. An investor with a small capital can't buy or manage a property of sufficient quality that yields an adequate return. Because each REIT unit is so cheap, it makes it easy to invest in income-generating real property.

Ideal for small investors: Directly Investing in Real Estate has many drawbacks. The most significant is the strong builders' lobby in the country. A small investor may not be able to do the necessary due diligence before investing in a particular project. REITs eliminate the need for developers to be involved.

Transparency - REITs can be traded on the exchanges. This makes price discovery simple. You can easily buy and sell REIT units without any hassles.

Assured Income: REITs must distribute 90% of their income to investors as dividends to ensure a steady income stream.

Conclusion

Indian REIT investing is gradually and steadily becoming accepted. Strong investor participation was witnessed at the first Indian REIT. Large REIT funds invest in commercial and hotel projects, data centres, warehouses, and other areas that are not possible for common investors. Diversification can be achieved by using REIT funds. REITs are an option to owning real estate.