Investing is essential to put your money to work and grow your wealth. Amongst different types of investments like fixed-income investments, equity investments, property investments, etc, it’s many times challenging to choose which investment fits you the best. However, choosing wisely while investing is necessary too as investments need to be lucrative and not stagnant at the same amount. But you know what? In India, two types of investments have always been favoured by the Indian folks - Fixed income investments and real estate investments
Additionally, real estate investments have always been a potent investment class among all other investment classes. Why? Because this investment class is secure, profitable, and creates a strong base for your future stability. This is the reason why 76% of Indians invest in real estate properties. Nowadays, real estate investing is not just solely limited to property investments. The real estate sector has spread its roots in the stock market too! Have heard about REITs? Well, if not then you should! This article will be your handy guide to understanding what REITs are and the opportunities in investing in REITs.
Let’s first understand what REITs are-
REITs (Real Estate Investment Trusts) are modeled like mutual funds, a publicly-traded company that owns, manages, and finances income-generating properties. REIT companies pool the capital of various investors giving them an opportunity to earn dividends from real estate investments without having to own, manage or finance a property on their own!
Time for the facts! Congress introduced REITs in the USA in 1960! This was done solely to provide investors a chance to invest in income-generating real estate properties. Since then the REIT approach has flourished in 40 countries around the world! Around 90% of people in the US invest in REITs.
The Securities Exchange Board of India (SEBI) introduced REITs in 2007. However, the securities watchdog only released draft rules which, because of certain limitations, were later rejected. Sebi issued new REIT regulations in September 2013, which were approved on September 26, 2014. It then was launched by 3 different REIT companies after 2016. So now, India has 3 REIT companies
So you might be thinking why REITs?
Real estate investments are a great way to manage and grow your wealth. In the past 10 years, From the years 2010-2020, real estate prices took a jump of 38%. Also, the recent inflation breakout and the increased interest rates on property loans are something that can stretch your worry lines.
Though the sector has seemingly become competitive in case of the price ranges. REITs have given us the opportunity to invest in income-generating properties at the lowest prices! REITs just need as low as Rs. 500 to invest!
Are REITs a safe option to invest in?
Absolutely yes! REITs are a safe option to invest in as this investment class is monitored and backed by SEBI. Let’s understand how SEBI works from the following pointers-
Here is what SEBI means and does-
SEBI stands for Securities and Exchange Board of India. This is a statutory regulatory body that was created by the government of India in 1992 to protect the interests of investors and regulate the securities market. SEBI also regulates how mutual funds and the stock market operate.
- Investor protection is the most important function of SEBI. It protects the rights of investors and ensures that the investments done are safe and secure.
- Preventing malpractices related to trading and imposing rules and regulations on activities of sock exchange.
- To develop a code of conduct for the financial intermediaries such as underwriters, brokers, etc.
SEBI's secured norms protect investors' trust. These rules also apply to REITs, as they are publicly traded stocks.
Listed below are some of the SEBI regulations and rights with regards to investing in REITs-
All categories of investors are allowed to invest in the REIT units.
Investors can invest in REITs after they have been issued and listed on stock exchanges in a similar manner to investing in shares of listed companies.
Certain rights reserved for investing in REITs are-
Right to receive distributions - The investor has the right to collect his/her returns on dividends received on investments.
Right to redressal of grievances- The fund managers or REIT authorities are responsible to resolve the issues or complaints of the investor.Right to receive exit offer in case of any specified transactions.- A person can exit the REIT transaction any time he/she wishes to, along with the profits earned.
Right to receive information required to be disclosed by the REIT and in the manner, prescribed under REIT Regulations- The investor must know everything about the REIT company, its background history and the business gains before, after, or while investing.
Also, SEBI has put upon certain regulations for the advantage of people investing in REITs-
90% of the taxable income of the company should be distributed as dividends or interest to the unitholders.
At least 80% of real estate handled by the REIT should be fully constructed and should be income-generating.
What to look for while investing in REITs?
Look for growth in earning in the REIT you wish to invest in. One way to examine growth in returns is to analyze the occupancy rate of the company, investment costs, and business growth opportunities of the REIT. Investing in a REIT requires research on the management team that oversees its properties. It is the ability of an effective management team to upgrade the facilities and boost services of a neglected building that will increase demand.
Let’s now look at the types of REITs-
1) Retail REITs
This type of REIT mainly invests in shopping malls, grocery stores, and supermarkets. REITs are required to invest 24% of their assets into commercial retail.
2) Residential REITsThese are REITs that operate residential facilities like apartments, and gated societies, that are rent generating. Looking at the growing residential property demand in India, these REITs have a lot of scope to invest in!
3) Office REITs
These REITs operate office space receiving rental income through tenants with long-term leases.
4) Healthcare REITsAs indicated by their name, these trusts are primarily involved in and operate healthcare-related real estate properties, such as hospitals, nursing homes, retirement communities, and medical centers.
5) Mortgage REITs
An estimated 10% of investments are done in the mortgages instead of real estate in the case of this REIT.
6) Diversified REITs
Diversified REITs own and manage different property types and collect rent from the tenants. For instance, diversified REITs can own the portfolios of office and retail properties giving investors an array of options to invest.
How are REITs beneficial?
- Small initial investment:
As mentioned earlier, property investments can sometimes be very expensive. REITs cut off the unaffordability by letting you own a share of the property by putting in small amounts usually up to (Rs.500) without you having to invest a large sum of money all at once to gain ownership.
REITs allow you to diversify your portfolio by giving you exposure to real estate without the hassles related to owning and managing a commercial property. This diversification allows you to go beyond the common investment class like equity, debt, and gold.
- Regular income generation:
According to the SEBI rules REIT companies are supposed to distribute 90% of their income to the unitholders in the form of dividends or interest. This has assured maximum wealth distribution. Apart from that, 80% of properties handled by REITs are imperatively fully constructed and income-generating. Hence, this assures regular income generation and lowers the risk of loss as there is a steady income flow of rent.
- Professional management:
Like mutual funds, REITs are managed by a professional and experienced management team. So, you don’t have to stress about your investments and can enjoy a hassle-free investing experience.
- High yield:
For many people, the main attraction to investing in REITs has always been their high returns on dividends. The average dividend yield on REITs has recently been trending between 6%-8%. Also, the dividend yields are often secured by stable rents from long-term leases and also some REIT managers imply conservative leverage on the balance sheets.
So, how will you invest in REITs
Just like exchange-traded funds (ETFs), REITs are listed and traded on stock markets, so purchasing units on the stock market is the best way to invest. Hence, it is important to create a Demat or brokerage account.
Mutual funds are another way to invest in REITs besides the stock market. Currently, the Kotak International REIT Fund of funds is the only international mutual fund in India focused exclusively on investing in international REITs.
A few domestic Mutual Funds have also started investing in REITs in the past few years, however, the actual exposure of these schemes to this Real Estate Investment is quite limited. Thus, the only way to gain meaningful exposure to Real Estate is currently through the purchase of REITs Units on the stock market.
You need to look at industry trends prior to investing in REITs. For example mall traffic has been declining as people are nowadays more inclined towards online shopping. So, the retail REITs that are exposed heavily to malls can be riskier to invest. Also one should have thorough research on the tenants of the company. Quality tenants are more likely to serve better yield!
Now is high time that Indian citizens should start investing in more liquid assets such as REITs. In this inflationary era, it is wiser to hold on to something solid that provides a hedge against inflation and gives more than what you invest(appreciation). So without further due, head on to our REITs page and start investing in REITs for as low as Rs. 500