Real Estate Investment Trusts (REITs) in India are an innovative investment avenue, connecting the realms of real estate and stock markets. Offering a streamlined approach to property asset investment, REITs operate akin to mutual funds. They enable a diverse range of investors to secure regular income, expand their investment portfolios and potentially increase their capital over time. This combination of stability and growth prospects renders REITs an attractive choice for investors aiming to balance income generation and long-term wealth accumulation. Delve deeper into REITs in India with this article, encompassing their types, advantages and associated risks.
What is REIT?
REITs, standing for ‘real estate investment trusts’, can be defined as companies that own and manage real estate assets to generate income. These companies oversee portfolios containing valuable real estate properties and mortgages. For example, they may lease out properties and collect rent from tenants. The rental income collected is distributed among shareholders as dividends.
REITs provide investors with an opportunity to gain exposure to high-value real estate assets and earn dividend income, potentially increasing their capital over time. This allows investors to benefit from capital appreciation and income generation.
Investors of all sizes, whether large or small, can invest in REITs and reap rewards. Small investors, for instance, may join forces with others to invest in large-scale commercial real estate projects. The types of properties included in REIT portfolios can vary and may encompass data centres, healthcare facilities, infrastructure, apartment complexes and more.
Evolution of REITs in India
REITs originated in the USA during the 1960s as an investment vehicle akin to mutual funds for facilitating real estate development by pooling investments from individuals interested in real estate. Investors reaped substantial dividends due to the flourishing real estate market, encouraging more real estate projects and benefiting both investors and developers. In India, SEBI introduced REITs in 2007, implementing regulations to facilitate their functioning. Presently, SEBI meticulously oversees and regulates REITs listed on Indian stock exchanges.
REITs in India
Presently, there are only three REITs in India:
- Embassy Office Parks REIT
- Brookfield India Real Estate Trust
- Mindspace Business Parks REIT
However, other prominent players in the Indian real estate sector are expected to launch their REITs in the future.
Types of REITs in India
In India, there are various REIT investments, each with a distinct focus on real estate. The most common types include:
Mortgage REITs
These REITs provide loans to real estate buyers and some may acquire existing mortgages, known as mREITs. They earn money from the interest generated on the mortgages. Operating like debt mutual funds, REITs entail higher risk factors.
Equity REITs
These REITs invest in properties, such as residential complexes, hotels, offices and industrial estates. They engage in buying, managing, developing and selling real estate properties to generate income, primarily through property rentals and sales. Profits earned are distributed among investors as dividends.
Retail REITs
These REITs focus on investing in the retail sector, including hypermarkets, shopping malls, grocery stores and supermarkets. Rather than operating these outlets, they concentrate on renting out the spaces to retail tenants. Returns from this REIT depend on the performance of the retail sector.
Healthcare REITs
These REITs invest in real estate required to operate health clinics, hospitals, medical establishments and other healthcare facilities. With the rising demand for healthcare services, healthcare REITs offer promising investment opportunities for investors.
Residential REITs
These REITs acquire and manage residential properties, such as gated communities, apartment buildings and housing projects. Residential REITs experience positive growth during increased demand for residential properties in India.
Office REITs
These REITs invest in office properties and generate income through rent.
How do REITs work?
Investors can select from various real estate funds based on the classification of REITs. For example, equity REITs encompass properties, such as hotels, shopping centres, offices and condos, while mortgage REITs derive their income from mortgage-backed securities or the interest earned on investments. REITs facilitate easy and swift liquidation of investments in the real estate sector, relying on infrastructural development and structured governance and encouraging investments domestically and internationally.
How does a company qualify as a REIT?
For a company to qualify as a REIT, it must meet several requirements, including:
- Issuing fully transferable shares
- Being a corporation or a business trust
- Being managed by a board of directors or trustees
- Distributing at least 90% of its taxable income as dividends to shareholders
- Having at least 100 shareholders
- Ensuring that no more than five individuals hold more than 50% of the company’s shares each year
- Ensuring that 20% of the company’s assets consist of stock in taxable REIT subsidiaries
- Generating at least 75% of gross income from mortgage interest or rent
- Allocating at least 95% of the REIT’s overall income for investment
- Investing at least 75% of its assets in real estate
Regulatory framework for REITs in India
REITs in India emerged relatively recently, with guidelines introduced by the SEBI in 2007. The current SEBI guidelines for REITs in India were established in September 2014. In the Indian context, a REIT operates in a three-tiered structure comprising a Sponsor, a Manager and a Trustee. Their roles and responsibilities, as outlined by SEBI, are as follows:
- Sponsor: Typically, a real estate company that owned the assets before the establishment of the REIT serves as the sponsor. For example, BSREP India Office Holdings, an Indian subsidiary of the US-based Brookfield Asset Management Inc., acts as the sponsor for the Brookfield REIT. The Sponsor’s duties include setting up the REIT, appointing the Trustee and holding a mandatory 25% stake in units for the first three years following the REIT’s After this period, the Sponsor’s stake may be reduced to 15% of the total outstanding REIT units.
- Manager: The REIT Manager is typically a company specialising in facilities management. For instance, in the case of the Brookfield REIT, Brookprop Management Services is designated as the Manager. Their responsibilities involve managing the trust’s assets, making investment decisions and ensuring timely reporting and disclosure by the REIT.
- Trustee: REIT Trustees are usually specialised companies providing trusteeship services. For example, Axis Trustee Services Limited operates as the Trustee for both Embassy Parks REIT and Brookfield REIT. Trustees are responsible for holding the trust’s assets in trusteeship for the benefit of the They oversee the Manager’s activities and ensure the punctual distribution of dividends.
Benefits of REITs
Investing in REITs in India offers several benefits, including:
- Affordable investment: Purchasing REIT shares is relatively inexpensive compared to direct property investment. Investors can buy a small number of units without investing a large amount of money.
- Transparency: REITs are listed on stock exchanges, providing investors with easy access to all relevant information online before making an investment decision.
- Ideal for small investors: REITs are particularly suitable for small investors as they do not involve direct dealings with builders. They carry lower liquidity risks than direct property investments.
- Low fraud risk: REITs are regulated by SEBI, resulting in a lower likelihood of fraud compared to other investment options.
- Reliable income: REITs provide reliable income through dividends derived from rental income.
Drawbacks of REITs
Investing in REITs in India comes with several drawbacks, including:
- Higher tax burden: Dividends from REITs are subject to higher tax rates compared to other investments.
- Limited growth potential: REITs may have limited growth potential due to the distribution of a large portion of income to the investors.
- High fees and increased risk: REIT investments often come with high fees and are associated with elevated risks.
- Limited control: Investors in REITs have minimal control over the performance and management decisions of the underlying properties.
- Vulnerability to real estate market trends: REITs are susceptible to fluctuations in the real estate market, which can impact their performance.
- Restrictions on share selling: There may be restrictions on selling REIT shares for a predetermined period.
Taxation on REITs in India
When considering investing in REITs, understanding the tax implications is essential.
- Short-term capital gains tax: If you sell REIT units at a profit within one year of purchase, you are subject to a short-term capital gains tax of 15%. However, if you hold the units for more than three years before sale, realising a profit exceeding Rs 1 lakh, you will be liable to pay a long-term capital gains tax of 10%.
- Taxation of dividend income: The taxation of dividend income from REITs depends on whether the REIT has a special tax concession status. If it does, the dividend income is taxable, otherwise it is not taxable.
- Taxation of interest income: All interest income generated from REITs is taxable.
- Tax treatment of SPV debt amortisation income: Income from the amortisation of Special Purpose Vehicle (SPV) debt is not taxable for the investor.
Who should invest in REITs?
Investing in REITs requires substantial capital, making it suitable for investors with significant funds. Institutional investors, such as endowments, insurance companies, pension funds and bank trust departments, can effectively invest in these financial instruments.
How to invest in REITs in India?
Investments in REITs in India can be made through various channels:
- Mutual funds: Some domestic mutual funds offer exposure to REITs, although the exposure to real estate is often limited. Alternatively, investors seeking international real estate exposure can consider investing in the Kotak International REIT Fund.
- Initial Public Offerings (IPOs): Investing in REIT IPOs requires thorough research and understanding of the associated risks. As the Indian REIT market is still evolving and offers limited options, waiting for the next REIT IPO could be a prudent strategy.
- Stock exchanges: REIT units can be purchased on stock exchanges. Investors need a demat account to buy these units and their prices can fluctuate based on demand and performance. Currently, there are three REIT options available in India– Brookfield India Real Estate Trust, Mindspace Business Park REIT and Embassy Office Parks REIT.
Tips to assess REITs before investing
- Research dividend yields: Look for corporations with a positive track record of offering high dividend yields. Analyse how the company facilitates capital appreciation over the long term.
- Consider stock exchanges: If you aim to diversify your investment portfolio without a long-term commitment, consider purchasing shares through stock exchanges.
- Look for diverse properties: Invest in REITs that hold diverse properties and tenants to reduce risk.
- Consider ETFs and mutual funds: Opt for exchange-traded funds (ETFs) and mutual funds for investing in REITs as they are managed by professionals, ensuring efficient management of investments.
- Choose experienced companies: Select companies with a long history in the field and an experienced team.
- Scrutinise management performance: Evaluate the management team of REITs based on metrics, such as funds from operations and financial management rates. Consider factors like growth in EPS and current dividend income to maximise returns.
Housing.com POV
REITs in India offer a unique investment opportunity that bridges the gap between real estate and stock markets. REITs allow investors to earn regular income, diversify their portfolios and increase their capital over time, making them an attractive option for balancing income generation with long-term wealth accumulation. The evolution of REITs in India has been marked by regulatory frameworks introduced by the SEBI, aiming to ensure their efficient functioning and regulation. Presently, there are three REITs in India, with more expected to enter the market in the future.
Investors can choose from various types of REITs, each with a distinct focus on real estate investments. Understanding how REITs work and the qualifications for a company to become a REIT is crucial for investors considering this avenue. While investing in REITs offers benefits, such as affordable investment options, transparency and reliable income, there are drawbacks to consider, including higher tax burdens, limited growth potential and limited control over management decisions. Assessing REITs before investing requires thorough research and consideration of factors, such as dividend yields, property diversification, management performance and taxation implications.
FAQs
What are REITs and how do they work?
REITs are companies owning real estate assets, earning income through rentals or sales and distributing dividends to shareholders.
What types of properties do REITs invest in?
REITs invest in residential complexes, offices, hotels, malls, healthcare facilities and industrial estates.
What are the benefits of investing in REITs?
REITs’ benefits include affordability, transparency, reliable dividends, portfolio diversification and exposure to high-value assets.
What are the risks associated with investing in REITs?
REITs’ risks include limited growth, higher taxes, high fees, vulnerability to market trends, limited control and share selling restrictions.
How can investors assess REITs before investing?
REITs can be assessed based on dividend yields, property diversification, management performance, taxation and investment options.
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