Are REITS in India a worthy investment option?
In developed Asian countries like Singapore and Hong-Kong, REITs or Real Estate Investment Trust is a popular investment option. However, the concept of REITs in India is yet to gain popularity among the Indians.
In simple words, a REIT is a collective investment scheme just like a Mutual Fund. It is an investment vehicle which pools your savings and invests in the portfolio of income generating properties. REITs are licensed to operate in India by the SEBI.
Structure of REITs
Although REITs are similar to Mutual Funds, they have a three-tier structure. A REIT consists of a Sponsor, a Fund Management Company, and a Trustee.
The sponsor is responsible to set up the REIT while the Fund Management Company selects and operates the real estate portfolio of the same. The Trustee ensures that the investors’ money is managed in the interest of the latter. Trustees have defined responsibilities which involve complying with all applicable rules and regulations that protect the investors’ rights.
How does REITs work?
A REIT pools money from investors and spends that sum in diverse real estates. It creates a portfolio of real estate assets including Offices, Residential Properties, Hospitals, Restaurants, Hotels, Warehouses, Corporate Buildings, etc.
A REIT is a trust which requires to be registered with a stock exchange. It issues its units via an IPO or Initial Public Offering. These units are consequently traded as securities in the stock exchange.
You can invest in the units of the REIT scheme in a similar way that you invest in shares, either in the primary market or the secondary market. The minimum ticket size of investing in a REIT fixed by the SEBI is Rs 2 lakh.
Now, the next big question is how to make money by REITs?
You can get returns from REITs in the form of dividends. Besides, you can also earn income in the form of capital gains if the REIT makes any profit by selling any of its property.
Quick Note: The minimum assets that a REIT is required to own are fixed at Rs 500 crore by the SEBI. Further, SEBI has made a rule that the minimum issue size has to be less than Rs 250 crore.
Perks of investing in REITs in India
As per SEBI guidelines, REITs are required to pay you at least 90% of their rental incomes every 6 months. Moreover, when REITs dispose of any of their properties, they have to distribute a minimum of 90% of such capital gains to their investors.
The activities of REITs have been also made transparent by the SEBI. A REIT has to compulsorily disclose the full valuation of their investments every year. Further, they are also required to update the same on a half-yearly basis.
Further, REITs are required to invest their money in a minimum of two projects as per SEBI. If a REIT chooses to invest only in 2 projects, it has to mandatorily invest 60% of its assets in a single project.
Besides, REITs have to allocate 80% of their assets in finished and revenue generating projects. They can invest the rest 20% of their money in under construction projects, mortgage-based securities, Government securities, cash & cash equivalents, and many others.
Should you invest in REITs in India or actual properties?
Living in own house is in the bucket list of the majority of the income earning Indians. Moreover, unlike stocks or equity market, the valuations of properties don’t fluctuate drastically. Ideally, the intrinsic value of properties keeps moving upwards and hence, investing in the real estate sector seems an appropriate idea for a majority of Indians.
Furthermore, one can also earn a significant income in the form of rentals by investing in a property. And that’s why, even after owning a house property, many people prefer buying their second or third home for earning income in the form of rental (and of course, capital appreciation over time).
Nonetheless, the ticket size of investing in real estate varies from a few lakhs to over crores which might not be affordable for the major earning population of India. Here, in order to earn a regular income, investing in REITs seems more bearable because of the lower ticket size and diversification benefits.
Overall, if you are looking to invest in the Real Estate sector of India but do not have a huge corpus, REIT seems to be a more appropriate investment option for you.
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REITs in India provide diversified and secured investment opportunities in the real estate sector. They are managed by professionals having years of experience and expertise who ensure to provide maximum returns to the investors at reduced risks.
By now, although investing in real estate seems profitable, but it is not free from limitations.
Firstly, no doubt, it is a profitable investment alternative for creating huge wealth but, it is only affordable for the upper-middle-class families and the affluent people. Second, both capital appreciation and rental income from properties depend on a lot of factors like infrastructure, location, industrial development, which may not always be in favor of investors.
Third, the Real estate in India has been affected by liquidity crunch in the past owing to low demand and unsold inventory. And lastly, although the Indian real estate sector is functioning under the regulations of SEBI, becoming an organized industry is still a distant future.