What Is REIT India? - TheMoneyFarm

Real Estate Investment Trust (REIT) is an abbreviation for a corporation that develops and owns ‘income producing’ real estate holdings. REITs and Mutual Funds are similar in that they both allow investors to combine their resources and have the assets managed by a designated person-in-charge.

Is REIT a good investment in India?

As a result, in addition to cheap entry levels, REITs offer investors a safe and diversified portfolio with low risk and expert management, providing good returns on investment. REITs will be distinguished not only by their investment in real estate assets, but also by their restricted responsibility for all unitholders.

That’s not all, though. According to the criteria, finished projects must account for 80% of assets, while under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities account for 20%.

REITs allow investors to put their money into a diverse portfolio of commercial real estate assets. Investors who choose the direct investment path for commercial office spaces invest in a single office building.

Will REITs be able to provide the same returns on investment as’actual’ real estate investments? This is a question that small investors will be asking. No, that is not the case. Certainly, investors expecting for unreasonable profits (>20-30 percent) should go elsewhere. It’s critical to have realistic expectations for REIT returns. After adjusting for the fund management cost, a realistic ROI estimate would be in the range of 7-8 percent each year.

The return on investment (ROI) from REITs will be highly structured, realistic, and risk-averse. Investors who desire a regular income with no risk might consider REITs. Furthermore, REITs can provide investors with two types of income: capital gains from the selling of REIT units and dividend income. REITs will also be a good investment option for investors who want to diversify their portfolio beyond gold and the stock market.

REITs have already been introduced in India, and investors have seen excellent returns. The successful REIT listings in India have piqued investor interest in this new investment vehicle, and we expect more REIT listings to follow soon.

Is REIT safe in India?

The goal of REITs is to distribute dividends generated by capital gains from the sale of commercial properties to investors. The REIT pays out 90% of its profits in dividends to its shareholders. It provides a secure and varied investment opportunity for those interested in real estate.

The REITs are open to the public. Every year, the REIT undergoes a comprehensive valuation as well as a half-yearly audit.
Diversification: According to the rules, REITs must invest in at least two projects, with the value of one asset accounting for 60% of the total investment.
Low Risk: REITs have a low risk profile because at least 80% of their assets are invested in finished revenue-generating projects. The remaining 20% is invested in under-construction properties, mortgage-backed securities, equity shares that earn at least 75% of their income from real estate, government securities, money market instruments, cash equivalents, and so on.

What is a REIT and how does it work?

REITs provide a simple option for investors of all sizes to add the historically successful investment class of real estate to their portfolios. REIT shares are owned by an estimated 87 million Americans today.

What exactly are real estate investment trusts (REITs)? A REIT (real estate investment trust) is a firm that invests in real estate that generates revenue. Investors who desire to gain access to real estate can do so by purchasing REIT shares, which effectively add the REIT’s real estate to their investment portfolios. This investment gives investors access to the REIT’s entire portfolio of properties.

Are there any REIT in India?

In 2019, India saw the launch of its first REIT (Real Estate Investment Trust). After two years, there are now three (Mindspace REIT, Brookfield REIT, and Embassy REIT). Institutional and individual investors alike have embraced REITs as a viable investment choice. Despite the uncertainty surrounding future office space expansion, this is the case.

Can you lose money in a REIT?

REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
Investors find it difficult to sell non-traded REITs because they have low liquidity.
When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.

Weak Growth

REITs that are publicly listed are required to pay out 90% of their profits in dividends to shareholders right away. This leaves little money to expand the portfolio by purchasing additional properties, which is what drives appreciation.

Private REITs are a good option if you enjoy the idea of REITs but want to get more than just dividends.

No Control Over Returns or Performance

Investors in direct real estate have a lot of control over their profits. They can identify properties with high cash flow, actively promote vacant rentals to renters, properly screen all applications, and use other property management best practices.

Investors in REITs, on the other hand, can only sell their shares if they are unhappy with the company’s performance. Some private REITs won’t even be able to do that, at least for the first several years.

Yield Taxed as Regular Income

Dividends are taxed at the (higher) regular income tax rate, despite the fact that profits on investments held longer than a year are taxed at the lower capital gains tax rate.

And because REITs provide a large portion of their returns in the form of dividends, investors may face a greater tax bill than they would with more appreciation-oriented assets.

Potential for High Risk and Fees

Just because an investment is regulated by the SEC does not mean it is low-risk. Before investing, do your homework and think about all aspects of the real estate market, including property valuations, interest rates, debt, geography, and changing tax regulations.

Fees should also be factored into the due diligence process. High management and transaction fees are charged by some REITs, resulting in smaller returns to shareholders. Those fees are frequently buried in the fine print of investment offerings, so be prepared to dig through the fine print to find out what they pay themselves for property management, acquisition fees, and so on.

Do REIT pay dividends?

A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.

All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.

How can I buy REIT units in India?

Commercial property, such as stores and office space, is a less typically used kind of Real Estate investment. However, huge ticket sizes of Rs. 1 crore or more are common in this sort of Real Estate investment, particularly in Metro and Tier 1 cities. When you factor in the difficulties of obtaining the necessary permissions, obtaining long-term leases from viable tenants, and assuring prompt rent payment, it’s no surprise that few people pick this investment option.

There is, of course, another method to get into real estate investing: buying stock in publicly traded real estate corporations. However, these investments are subject to market risk, and despite the fact that real estate is the underlying asset, they are more correctly classified as mid or small-cap equity investments with a high degree of volatility. As a result, only a small percentage of people can include real estate in their portfolio. However, a new option to invest in commercial real estate has arisen in India in recent years: the Real Estate Investment Trust, or REIT.

REITs are publicly traded real estate investments that allow investors to participate in the real estate market without having to buy or manage properties themselves. In this blog, we’ll go over what REITs are, how they work, how they perform, how they’re taxed, and whether or not you should invest in them.

What are REITs?

President Eisenhower signed the REIT Act title into law as part of the Cigar Excise Tax Extension of 1960, which gave birth to the REIT idea. The REIT was founded by the US Congress to allow US investors to invest in and profit from diverse, large-scale, professionally managed real estate portfolios in the United States.

REITs are similar to Mutual Funds in that they allow several investors to pool their funds and the assets are professionally managed by a designated Manager in both situations. However, while Mutual Funds’ underlying assets are typically Equity, Debt, Gold, or a combination of these, REITs’ underlying assets are primarily Real Estate Holdings or loans secured by Real Estate.

When a real estate company agrees to establish a Real Estate Investment Trust, it becomes the REIT’s Sponsor and names a Trustee. The Trustee holds the Trust’s Real Estate Assets in its Trusteeship, and the Sponsor no longer has direct control over these assets. A REIT can direct or indirectly control its Real Estate Holdings by using a Special Purpose Vehicle (SPV). In the case of REITs, the SPV is a domestic corporation that holds the REIT’s Real Estate Assets on its behalf, and according to regulations, the Trust must own at least 50% of the SPV.

The Trustee then hires a Manager to administer the Trust’s Real Estate Assets and make investment decisions on its behalf. The REIT can be registered after the Manager has been appointed. Once established, a REIT can raise funds by selling units to the public on stock exchanges or to private investors.

A REIT unit, at its most basic level, reflects part ownership of the Trust’s Real Estate Assets and entitles the unit holder to a portion of the REIT’s income. A REIT is typically obligated to pay out at least 90% of its Net Taxable Income in dividends and interest to its unitholders. The following section will introduce you to the many types of REITs available around the world.

Different Types of REITs

The following are the several types of REITs available internationally, based on the type of Real Estate holdings:

Retail REITs: These REITs must invest at least 24% of their assets in commercial retail, such as shopping malls and standalone retail establishments.
Residential REITs: These are Real Estate Investment Trusts that own and operate rental apartment complexes and manufactured homes.
Healthcare REITs: As their name implies, these trusts invest in and run healthcare-related Real Estate such as hospitals, nursing homes, retirement communities, and medical centers.
REITs that invest in and manage office space are known as office REITs. The rental income obtained from tenants with long-term leases is thus the primary source of income for this form of REIT.
Mortgage REITs: In these REITs, around 10% of assets are placed in mortgages rather than tangible real estate.

Now that we’ve reviewed the basics of REITs, let’s look at how they work in India.

REITs in India

The concept of a Real Estate Investment Trust is relatively new in India, with SEBI (Securities Exchange Board of India) issuing the first guidelines in 2007. In September 2014, the SEBI approved the existing REIT criteria in India.

In India, just three REITs are now accessible for purchase: Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust. Other major real estate companies, such as DLF and Godrej, are expected to launch REITs in the future.

A REIT in India has a three-tiered structure with a Sponsor, Manager, and Trustee, each of whom performs important tasks for the Trust. According to SEBI, their primary functions and responsibilities are as follows:

Sponsor – Typically, this is a real estate firm that owned the assets previous to the REIT’s formation. The Brookfield REIT, for example, is sponsored by BSREP India Office Holdings V Pte. Ltd., an Indian affiliate of Brookfield Assets Management Inc., based in the United States. The Sponsor is in charge of forming the REIT and naming the Trustee. For the first three years after the establishment of a REIT, the REIT Sponsor and the sponsor group are required to possess 25% of the units. After three years, the sponsor investment might be reduced to 15% of the total REIT units outstanding.
Manager – A real estate investment trust (REIT) manager is usually a corporation that specializes in facilities management. Brookprop Management Services Pvt. Ltd., for example, has been selected as the manager of the Brookfield REIT. Responsible for managing the REIT’s assets, making investment decisions, and guaranteeing the REIT’s timely reporting and disclosure.
Trustee – Companies that specialize in delivering Trusteeship services are often chosen to serve as REIT Trustees. Embassy Parks REIT and Brookfield REIT, for example, have Axis Trustee Services Limited as its trustee. The Trustee is in charge of holding the REIT’s assets in trust for the benefit of unitholders. They are also responsible for overseeing the manager’s activities and ensuring that dividends are distributed on time.

an important addition The following are the SEBI-mandated requirements that REITs in India must meet in order to qualify:

A REIT’s investments must consist of at least 80% commercial properties that can be rented out to generate revenue. The trust’s remaining assets (up to a maximum of 20%) can be invested in stocks, bonds, cash, or under-construction commercial property.
At least 90% of the REIT’s rental income must be delivered to unitholders in the form of dividends or interest.

We’ll go over how real estate corporations benefit from the formation of REITs in the next section.

Why are REITs Created?

REITs clearly enable investors to invest in and benefit from commercial real estate, which is otherwise out of reach for small retail investors. However, there are a few advantages to real estate corporations forming a REIT. REITs also benefit from a few significant tax breaks not available to other types of Real Estate firms in India:

Interest and dividend payments received by a REIT from a Special Purpose Vehicle (SPV) are tax-free. In this sense, an SPV is a domestic firm in which the REIT owns at least a 50% share. A REIT can theoretically control 50% or more of several SPVs that own separate Real Estate properties on the REIT’s behalf.
Any revenue earned from renting or leasing Real Estate Assets owned directly by the REIT (rather than through an SPV) is also tax-free.

Real estate companies may be able to minimize their tax obligation and produce more revenue as a result of these tax benefits. Furthermore, by listing a REIT on the stock market, a Real Estate business might gain access to extra money for future projects through an initial public offering (IPO). The purpose of any investment is to generate profits for the investor, so let’s look at how REITs accomplish this.

How Do REITs Generate Returns for Investors?

Any investment should aim to build wealth for investors and/or provide a steady stream of income. REITs provide unitholders with both of these advantages. Investors can get monthly dividends and/or interest payouts, providing consistent income, while also receiving capital gains through the sale of REIT units on stock exchanges.

Dividends and Interest: REITs pay out dividends and interest from their net rental income. After deducting some important expenses connected to management and maintenance of the facilities, this is the income that a REIT obtains from renting out and leasing Commercial Real Estate. Management fees, depreciation, and maintenance charges are some of the charges deducted from Gross Rental Income to arrive at a REIT’s Net Income. According to the current SEBI mandate, REITs must pay out at least 90% of net rental revenue to investors in the form of dividends and interest.
Capital Gains: Because REITs are listed and traded on stock exchanges, the price of individual units fluctuates based on performance and market demand. A REIT’s outstanding performance, like that of Equity Stocks and Mutual Funds, leads to an increase in the price of REIT units, which can then be sold for a profit and deliver Capital Gains to the investor. Let’s take a closer look at the primary advantages and disadvantages of investing in Real Estate Investment Trust units.

Benefits and Limitations of Investing in REITs

Diversification: Real estate investment trusts (REITs) allow you to diversify your investment portfolio by exposing you to real estate without the difficulties of owning and managing commercial property. As part of your overall Asset Allocation Strategy, this diversification allows you to move beyond the traditional asset groups of equity, debt, and gold.
Small Initial Investment: As previously said, one of the major drawbacks of real estate investing is the huge ticket size, particularly in the case of commercial properties. To deliver similar portfolio diversification benefits, REITs require a significantly smaller initial investment of roughly Rs. 50,000.
Professional Management: A REIT’s properties are professionally managed. This ensures that activities run smoothly and that you don’t have to put in any effort to manage Commercial Real Estate.
REITs produce money from rental collections and are obligated by law to transfer 90% of this income to investors in the form of dividends and interest payments. REITs provide investors with consistent income in this way.
REITs are listed and traded on stock exchanges, and their value is determined by their performance. A well-performing REIT can thus possibly increase in value and be sold at a profit over time. The investor receives Capital Gains as a result of this.
There are currently just three REITs and one International REIT Fund of Fund in India. This severely restricts the options available to investors.
Low Liquidity: While REITs are listed and traded on stock exchanges, the number of market participants, particularly among individual investors, is currently low. As a result, profitably selling REIT investments may be difficult, especially in an emergency. As a result, the investment’s liquidity is minimal.
Dividends and interest received from REITs are fully taxable in the hands of the investor, according to the appropriate slab rate. As a result, taxpayers in the 30% tax bracket will see a significant amount of their dividend income go to taxes. The taxes requirements, which are explained next, are another crucial factor to consider before investing in REITs.

Taxation Rules for REITs

Because REITs generate various sorts of income, two different taxes procedures apply: one for dividend income and the other for capital gains. Furthermore, when an investment is redeemed through an International REITs Fund of Fund, the tax treatment is different. The following are the taxation rules that apply:

Dividend Taxation: Dividends received from REITs are totally taxable in the hands of the investor under existing rules. REIT dividend payouts are included in the investor’s annual income and taxed at the investor’s slab rate for the corresponding Financial Year.
Capital Gains Taxation: Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) are both applicable to equity investments and cover capital gains from the sale of REIT units. The STCG is applicable if the units are held for a duration of one year or less from the date of allocation. The capital gains tax rate on capital gains from the selling of units is 15%. LTCG taxation regulations apply if the holding duration exceeds one year from the date of unit allocation. The LTCG tax rate is 10% on gains over Rs. 1 lakh (across all equity investments for the applicable FY) and there is no indexation advantage.
Capital Gains Taxation for International REIT Fund of Funds: Capital Gains obtained from the sale of units of International REIT Fund of Funds are subject to non-equity capital gains taxation. If the holding period is three years or less, Short Term Capital Gains are applicable (calculated from the date of unit allocation). In this situation, the STCG is calculated using the investor’s applicable slab rate for the fiscal year. The LTCG tax is 20% on indexed Capital Gains on units held for more than 3 years, calculated from the date of unit allocation. Let’s look at how you might invest in REITs next.

How to Invest in REITs

Because REITs, like Exchange Traded Funds (ETFs), are listed and traded on stock exchanges, buying units on the stock market is the best way to invest. As a result, if you want to invest in REITs in India, you’ll need a Demat Account. The price of REIT units on stock exchanges fluctuates based on demand for units as well as the REIT’s performance, just as that of Exchange Traded Funds. Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust are the three options available right now.

You can invest in REITs through mutual funds in addition to stock market transactions. Currently, the Kotak International REIT Fund of Fund is India’s only international mutual fund that invests solely in international real estate investment trusts. In recent years, a few domestic mutual funds have begun to participate in REITs; nevertheless, their real exposure to this Real Estate Investment is fairly restricted. As a result, the only option to get meaningful exposure to real estate right now is to buy REIT Units on the stock market. Now that you know the major features, benefits, and restrictions of REITs, as well as how to invest in them, let’s tackle the big question: “Should you invest in REITs?”

Who owns a REIT?

The first REITs were mostly made up of mortgage companies when they were founded in 1960. In the late 1960s and early 1970s, the sector witnessed substantial growth. The increased use of mREITs in land development and construction projects accounted for the majority of the expansion. In addition to business trusts, the Tax Reform Act of 1976 allowed REITs to be formed as companies.

REITs were also influenced by the 1986 Tax Reform Act. New provisions were included in the bill to prevent taxpayers from establishing partnerships to hide their earnings from other sources of income. REITs suffered substantial stock market losses three years later.

With the founding of the UPREIT in 1992, retail REIT Taubman Centers Inc. ushered in the current era of REITs. The parties of an existing partnership and a REIT form a new “operation partnership” in a UPREIT. The REIT is usually the general partner and majority owner of the operating partnership units, with the contributors having the option to exchange their operating partnership units for REIT shares or cash. As the global financial crisis hit in 2007, the business began to struggle. Listed REITs deleveraged (paid off debt) and re-equitized (sold stock to raise cash) their balance sheets in reaction to the global credit crisis. Listed REITs and REOCs raised $37.5 billion in 91 secondary stock issues, nine initial public offers, and 37 unsecured debt offerings, as investors reacted positively to corporations bolstering their balance sheets in the aftermath of the credit crisis.

At lower rates, REIT dividends have a 100 percent payout ratio for all income. As a result, the REIT’s internal growth is stifled, and investors are less willing to accept low or non-existent dividends because interest rates are more volatile. Rising interest rates might have a net negative effect on REIT shares in certain economic climates. When compared to bonds with rising coupon rates, REIT payouts appear to be less appealing. Furthermore, when investors shun REITs, it becomes more difficult for management to generate extra cash to buy new real estate.

What is REIT income?

A real estate investment trust (REIT) is a corporation that owns, operates, or funds assets that generate revenue.
REITs provide investors with a consistent income stream but little in the way of capital appreciation.
The majority of REITs are traded on the stock exchange, making them extremely liquid (unlike physical real estate investments).
Apartment complexes, cell towers, data centers, hotels, medical facilities, offices, retail centers, and warehouses are among forms of real estate that REITs invest in.

Can you get rich investing in REITs?

There is no such thing as a guaranteed get-rich-quick strategy when it comes to real estate equities (or pretty much any other sort of investment). Sure, some real estate investment trusts (REITs) could double in value by 2021, but they could also swing in the opposite direction.

However, there is a proven way to earn rich slowly by investing in REITs. Purchase REITs that are meant to grow and compound your money over time, then sit back and let them handle the heavy lifting. Realty Income (NYSE: O), Digital Realty Trust (NYSE: DLR), and Vanguard Real Estate ETF are three REIT stocks in particular that are about the closest things you’ll find to guaranteed ways to make rich over time (NYSEMKT: VNQ).