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What is Real Estate Investment Trust

24 Aug 2023

Introduction

REITs refer to companies that own and operate real estate properties. They pool funds from several investors to buy such properties and manage them to benefit from rental income and capital appreciation. REITs invest in properties like warehouses, malls, office spaces, etc., and generate rental income. As an individual investor, you can invest in REITs and earn dividends. Listed REITs can also be traded on the stock market, like shares. 

How do REITs work?

REITs operate in a manner quite similar to mutual funds. They comprise a sponsor, a trustee, and a fund management company. While the sponsor promotes the REIT with funds, the fund management company is responsible for choosing and buying properties for the portfolio. The role of the trustee is to make sure the pooled funds are used and managed in the interest of the investors. 

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Types of REITs

India has six different types of REITs that are as follows:

  • Equity REITs

Equity REITs are one of the most popular types of REITs. They own, operate, and manage income-generating commercial properties. The rental income is distributed to the investors. 

  • Private REITs

Private REITs work as private placements and have a limited number of investors. These REITs are neither listed on the stock market nor registered with SEBI.

  • Publicly traded REITs

Unlike private REITs, publicly traded REITs are listed on the stock exchange and registered with SEBI. You can buy its shares through a stock exchange. So, publicly traded REITs are more liquid. However, at the same time, they are more prone to market volatility. 

  • Public but not listed REITs

Public but not listed REITs are registered with SEBI but not listed on the stock exchange. Hence, they are less liquid but comparatively more stable than publicly traded REITs. 

  • Mortgage REITs

Also known as mREITs, mortgage REITs lend to real estate industry businesses. Their income is generated not through rent but EMIs or mortgage payments. Mortgage REITs also acquire mortgage-based properties. The interest earned is distributed to the investors. 

  • Hybrid REITs

Hybrid REITs have owned properties as well as mortgage properties. They earn income via rent and interest, providing diversification to the investors. 

Eligibility criteria for a company to qualify as a REIT

According to SEBI guidelines and Section 4 of the Regulations, here’s a list of eligibility criteria to qualify as a REIT:

  • The company must be a trust under the Indian Trust Act, 1882
  • It should be registered under the SEBI REITs Regulations
  • It should have an asset base of a minimum of INR 500 crore 
  • The company should invest 80% of the funds in income-generating properties, while the remaining 20% can be put into other instruments 
  • Only 10% of the investment can be done in under-construction properties 
  • The company should make investments only in office premises and commercial real estate 
  • At least 90% of the taxable income should be distributed as dividends to shareholders 

Why should you invest in REITs?

Now that you know what REITs are and how they work, here’s why you can consider investing in these assets: 

  • Investing in REITs can provide you with a regular source of income in the form of dividends
  • Due to the rise in demand for office spaces, you can benefit from capital appreciation
  • You can diversify your real estate portfolio across several locations in the country
  • REITs do not come with a lock-in period, and most of the REITs are tradable on stock exchanges
  • REITs are regulated by robust corporate governance 

Conclusion

REITs do not acquire real estate properties to sell them. Instead, they purchase and develop properties mainly to operate them as a part of their portfolio.  

The concept of REITs is comparatively new in India. The Securities and Exchange Board of India (SEBI) introduced the first guidelines in 2007.  With its recent notification, SEBI has reduced the minimum REIT investment to INR 10,000-INR 15,000. The minimum lot size was also reduced from 100 to 1 unit. 

REITs can be a good option to diversify your portfolio and invest in assets other than stock or bonds. They can also be a hedge against inflation. 

 

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