5 mins read . 27 Jan 2023
There are a number of listed REITs in India. Most of the REITs have performed fairly well in the Indian context post-listing. While we shall look at the concept of REITs in much greater detail, you can understand REIT as a real estate mutual fund. In India, residential REITs are not permitted so all the existing REITs are only on commercial property. Unlike the mutual fund that holds shares and bonds in its portfolio, the REIT holds a portfolio of commercial real estate assets. The rentals earnings and the trading profits are distributed to the REIT holders in the form of dividends and capital distribution. They not only diversify the existing portfolio but also allow small investors to indirectly participate in commercial property
A typical listed REIT collects funds through a public issue and then allocates these funds to create a portfolio of real estate portfolio. The difference is that REITs are floated by entities that already have a real estate portfolio and use the IPO to hive it off as REIT units. The REIT typically invests in a portfolio of real estate (property) assets. For an investor, the REIT is like a real estate mutual fund. Instead of investing in commercial properties, which is out of reach for most retail investors, REITs allow investors to indirectly hold a share in commercial property through REITs. REITs convert real estate into a financial asset.
Before we get into the benefits of REITs, here is a quick look at the REIT structure. Like a typical mutual fund, the REIT works like the AMC of a mutual fund. It collects money from investors, aggregates and invests the same in a portfolio of commercial real estate assets. The REIT can only invest in commercial property assets and it is required to mandatorily distribute 90% of any income by way of rentals and capital gains as dividends to REIT unit holders. REITs are treated as pass-through intermediaries and are tax-exempt.
Apart from the fact that REITs offer one more asset class to invest in, there are some very distinct benefits that investors can have by investing in REITs
What is the downside risk of investing in REITs? Firstly, since REITs offer a stake in commercial property, the value of your REIT will depend on market prices. Property prices have the propensity to be volatile and also opaque in their pricing methodology. This gets transmitted to REITs too. Above all, there are few benchmarks to evaluate performance and the history of REITs is also very limited. Also, the varied state-level rules can also make these REITs cumbersome.
However, it cannot be denied that REITs do offer a unique and intelligent avenue for investors to diversify risk and take exposure to commercial real estate.