(A)Meaning:
-REITs(Real estate investment trust) can be described as a company that owns & operates real estates to generate income.These are corporations that manage portfolios of high-value real estate properties & mortgages.
-Typically, REITs offer investors an opportunity to possess high-priced real estate & enable them to earn dividend income to boost their capital eventually. This way, investors can utilise opportunity to appreciate their capital & generate income at the same time.
-Both big & small investors can park their funds into this investment option & reap benefits accordingly. Properties included in REITs comprise data centres, infrastructure, healthcare units, apartment complexes, etc.
-Like units in mutual funds, REIT investors can purchase units & invest in portfolio of diverse, income-producing properties. REITs pool investors’ money in owned/managed real estate properties & distribute income among investors proportional to units owned.
(B)How do REITs Generate Returns for Investors?
-REITs receive its income by renting out & leasing underlying real estate & after deduction of key expenses, net income is distributed to REIT unit holders in form of dividend or interest income. The current SEBI mandate states that at least 90% of net rental income received by REITs must be paid as income to investors.
-Investors are also subject to capital gains as REITs are listed & traded on stock exchanges, thereby price of individual units increase or decrease depending upon their performance & demand.
(C)How does a REIT work?
-When a Real Estate Company decides to form a REIT, it becomes Sponsor for REIT & appoints a Trustee.
-Trustee holds Real Estate Assets of Trust in its Trusteeship & these assets are no longer directly controlled by Sponsor.
-A REIT may control its Real Estate Holdings either directly or through formation of another domestic company(SPV)that holds Real Estate Assets on behalf of REIT & as per regulations, Trust holds 50% or higher stake in this domestic company.
-Next, Trustee appoints Manager to manage Real Estate Assets on behalf of Trust & also make investment decisions. After Manager is appointed, REIT can be registered. Once registered, REIT can raise money through sale of units either publicly on stock markets or through private investors.
-At the most basic level, REIT unit represents part ownership of Real Estate Assets held by Trust & this entitles unit holder to share of income generated by REIT.
(D)How to Invest in REITs?
There are 2 ways of investing in REITs;
1.)Stock Market
2.)Mutual Funds
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-REITs are listed & traded on stock markets just like ETFs, as a result, purchasing units on stock market is best way to invest. At present, you have 3 options – Embassy Office Parks REIT, Mindspace Business Park REIT & Brookfield India Real Estate Trust.
-Apart from stock market purchases, you can also invest in REITs through mutual funds. Currently, Kotak International REIT Fund of Fund is the onlyInternational Mutual Fundin India that invests exclusively in International REITs. A few domestic Mutual Funds have also started investing in REITs in past few years, however, actual exposure of these schemes to this Real Estate Investment is quite limited.
(E)Taxation Rules for REITs
Taxation of Dividends:As per current rules, dividends obtained from REITs are completely taxable in the hands of the investor. Dividend payouts from REITs are included in the annual income of the investor and taxed according to the investor’s slab rate for the applicable FY.
Taxation of Capital Gains:Capital gains from sale of Indian REIT units are subject to short-term capital gains tax at 15% if held for less than one year.Units held for more than three years are subject to LTCG tax at 10% if they result in an income over Rs.1 lakh.
Taxation of Capital Gains for International REIT Fund of Funds:If Capital Gains are obtained from the sale of units of International REITs Fund of Funds, non-equity Capital Gains taxation rules are applicable. In this case, STCG is applicable if the units are held for <3years & is taxed at applicable slab rate of the investor for the FY. LTCG tax is applicable on units held for over 3 years & is taxed at 20%.
(F)Advantages of REITs
-Investment in real estate properties can be very capital intensive. However, shares of REITs are comparatively affordable, as investors can purchase few units at a time without worrying about large capital outflows.REITs are suitable for small Investors too, as these eliminate direct dealing with property builders.
-Also, REITs come with lower liquidity risk as compared to direct property investment. However, there’s high liquidity risk as compared to other investment options & it might turn out to be a lil difficult to sell REITs in emergencies that too in profit.
-REITs are listed in stock exchanges. Hence all pertinent details can be checked online by investors before making an investment.
-REITs offer income to investors primarily through dividend. The dividend payment in most REITs is relatively assured. This is because the primary source of earning is through rental (lease) income.However, as dividend income from REITs is taxed as per the applicable slab rate, those investors that fall in 30% tax slab would lose a substantial portion of their dividend income.
-REITs are regulated by SEBI, and therefore the chances of fraud are low.Currently there are only 3 REITs and 1 International REIT Fund of Fund in India. This significantly limits the choices for investors.
(G)Should You Invest in REITs?
-The primary reason to invest in REITs is to diversify your investment portfolio through exposure to Real Estate without hassles related to purchasing & maintaining one or more immovable properties.
-Because of the limitations that REITs face, it is recommended that it should only form a minor part of your portfolio (ideally no more than 10%). Your decision to invest in REITs should ideally depend on whether you have already optimized asset allocation across Equity, Debt & Gold & are now looking to invest in Real Estate.
-As REITs are most expensive avenues of investments, investors should park their fund in REITs if they have substantial capital at their disposal. Usually, big institutional investors like insurance companies, endowments, pension funds, etc. invest in this instrument.
-Including REITs in one’s retirement portfolio tends to prove beneficial. There are various types of REITs (Equity REIT, Mortgage REIT, Retail, Healthcare, Residential REITs) depending on the type of RE property it invests in.
As per vide notification dated 30th July 2021, the Securities and Exchange Board of India (SEBI) changed the minimum investment requirement of Rs 50,000 worth of units to Rs 10-15K for investing through IPOs & FPOs. Additionally, the minimum lot size requirement of 100 units of REIT funds in India was brought down to 1 unit. If you are investing directly through the stock market, there is no minimum investment requirement.
