REIT is a new concept for investing. It is like a mutual fund house which gather money from the retail market and invest into real estate projects. In Real estate investment trust, you will be able to invest in the property with the less money. You will become an owner of the property upto the extent of your investment. There are few PROS and CONS of investing into REIT which we will cover in this article.
What is Real Estate Investment Trust (REIT)?
REIT is a collective investment instrument which gathers and manage real estate property portfolio and give returns to the investors. As per the SEBI, all REITs are required to be listed on the exchanges and have to offer Initial Public Offer (IPO) to invite retail people to invest in real estate.
REITs allows you to invest in real estate in small amount through units like we have in mutual funds. The REITs are responsible for purchase and sell of the property and generate income for the investors. Through REIT you can invest in the property’s portion which requires a huge money otherwise to purchase fully by an individual.
There are 3 types of REIT available as of now.
- Equity REIT – Purchase, manage income generating properties
- Mortgage REIT – Lend money directly or indirectly to real estate owners
- Hybrid REIT – Combination of Equity & Mortgage REIT
The REITs are operating same like mutual fund, but here the money is invested in commercial real estate properties instead of equity and fixed income securities. In REIT, there is an investor who invest money, a trustee who manages the money on behalf of the investors, a fund manager who makes the investment decision on behalf of the investors.
The investors will get yearly returns on their investment. REITs are directed to give a certain portion of the money back to its investors on a yearly basis. So there is a fixed income (dividend) alike concept in REIT.
Should you invest in real estate investment trust (REIT)?
Well, there are many schools of thoughts on the REIT investment in India. The first-ever REIT investment IPO of Embassy Office Park has just launched on 18th March 2019 and will be listing on 3rd April 2019. Since it is the first REIT IPO we don’t have any past trends to judge/comment on the performance. However, we will contemplate some points to derive a conclusion about whether you should invest in REITs or not.
PROS of REIT
- An investor will be able to invest in real estate with relatively low capital.
- Buy and sale using a demat account – Like ETF funds
- Dividend like yearly payout
- There will be a professional fund manager to manage the properties – as we have in mutual funds
- REIT mostly invest in commercial properties, where the gain is higher than the residential properties
- 80% investment in completed rent-generating properties so rental income can be generated from the day one
- 20% in cash, money market bonds, Govt. bonds, realty stocks and property under construction
- Compulsory income distribution as a dividend
CONS of REIT
- There is no “Growth” option as we have in mutual funds – You can not reinvest your earned income directly
- There is a tax liability on the income you get from the REIT investment
- 10% LTCG on income if you hold the stake for more than 3 years
- 15% STCG on income if you hold the stake up to 3 years
- REIT is like sectoral mutual funds, so if the real estate sector doesn’t perform well, your investment will also not yield good returns
- Sometimes there are legal issues of construction and possession of the property which can affect your returns
- Since we don’t have any past performance available with us, we can not compare it with any benchmark – No benchmark as of now
- In some cases, the rental yield is lower than the inflation, so you can’t beat the inflation
- The trustee can also invest in the REIT, so sometimes there will be a conflict of interest
- To get the real gain in real estate the holding period should be as high as 10-20 years
- Initial investment amount starts at Rs. 2+ lakhs
The REIT concept in India is very new and we don’t have any past performance available. There are many other fixed income instruments available which can give you REIT equivalent returns. So why to take so much of risk and headache in investing in real estate property?
You can always buy REIT from the secondary market if it proves to be a fruitful investment. Don’t rush in hurry and jump into the unknown sea where there is no guarantee of returns.
My take on the REIT is – WAIT AND WATCH