Indian Real Estate sector may grow up to US$ 1 trillion by 2030.
Even though the real estate industry is struggling at the moment because of the pandemic, there is an immense opportunity for growth in this sector in the upcoming years. It is expected that the real estate industry itself can contribute to 13% of the economy’s GDP by 2025.
To invest in the real estate industry, you do not need to buy a house or a property. There are other ways to make the most out of this growth. For example, you can invest in the real estate industry using REIT funds. So, what are these REITs, and how you can invest in them? Let us discuss REITs in brief in this article.
What are REITs?
REITs mean Real Estate Investment Trusts. These are companies that have the ownership of multiple properties, and they operate them to generate income. They manage the portfolios of the real estate properties with high value and also finance them.
In simple words, these companies invest in such properties which can earn and generate a return. For instance, the REITs have multiple properties; they rent all the properties. The rent received in the income generated and divided amongst the investors. Since it is not always possible for individual investors to own high-end properties all by themselves, REITs have come into existence. They are on similar lines of mutual funds where investments of many investors are pooled together. Then the invested amount is used for acquiring properties and operate them to generate income. As a result, investors earn dividends and also the value of their investment grows with time.
Types of REITs
There are different types of REITs. The most common three types include –
- Equity REITs: These REITs are the most sought after amongst all other REITs. The income is mainly generated from rent and primarily has commercial properties.
- Mortgage REITs: These REITs mainly finance the real estate owners and proprietors. They generate income from the interest earned on the mortgage provided. They also take securities backed by mortgages.
- Hybrid REITs: These REITs have both the option of investing in mortgage or equity REITs as per the investor’s choice, or they can invest in both to diversify their portfolio. The income is generated both from rent and interest earned on the mortgage.
Another classification of REITs is done based on the type of the company – it can be privately traded REITs or publically traded REITs and public non-traded REITs, under the SEBI regulations.
Benefits of investing in REITs
There are multiple benefits of investing in REITs, some of which are:
1. Capital appreciation:
The real estate sector in India got US$ 5 billion of institutional investment in the year 2020; this suggests the industry has immense potential. So, it is expected that this sector can drastically increase your investment value in the coming few years. Moreover, multiple government schemes like Pradhan Mantri Awas Yojana (PMAY) under which 20 million affordable houses are to be built can bring this sector to the top.
2. Dividends income:
With capital appreciation, you can expect to get dividends as well on your investments in REITs.
3. Diversification:
REITs help you diversify your portfolio with different types of real estate assets.
4. Regulated and highly transparent:
With the exception of Private REITs, SEBI regulatesthe REITs in India. Thus you get all the information and data directly from it. Thus there is complete transparency as well.
5. Liquidity:
Since Publicly traded REITs are traded on stock exchanges of the country, you can easily buy and sell these funds.
Additional Read: Investment in Property v/s Investment in Equity: Where to invest
Limitations of investing in REITs
There are certain limitations in investing in REITs as well:
1. Tax aspect
The income received by REITs has been considered to be from a Special Purpose Vehicle (SPV) as a pass-through instrument.
The taxability of dividends is subject to whether or not the SPV has opted for concessional tax regime. If the SPV has opted for concessional corporate tax then it is taxable in the hands of the investor as per investor tax slab with 10% withholding tax and if the SPV has not opted for the same then divided income is exempt.
Since REITs are listed on the stock exchange, there is long term as well as short-term tax implications on the units sold by the investor.
- For a holding period of 3 years, there is a 10% LTCG taxation in excess of Rs 1 lakh
- For a holding period of less than 3 years, the STCG taxation on the units would be 15%.
However, for the sale of units of International REITs, non-equity Capital Gains Taxation norms would be applicable.
Additional Read: Constant Changes in the Income Tax Structure Highlight the Need for Wealth Management
2. Investment risk
Since each REIT invests in a specific type of property, there is a risk associated with the same, due to less diversification. Also, with REITs prices are sensitive to interest rate fluctuations. Since REITs are long term investments, there could be a short-term price fluctuation which might affect investor psychology.
REITs in India
In India, at present, there are three REITs, regulated by SEBI with a total market capitalisation of US$ 7.6 billion. SEBI announced its first guidelines on REITS back in 2007. The recent guidelines were enforced in 2014.
The three REITs in India are Embassy Office Parks REIT, Brookfield India Real Estate Trust, and Mindspace Business Parks REIT. It is expected that companies like DLF and others will get into the REIT space soon.
Conclusion
Investors expect regular dividends and capital appreciation from their investment, and REITs are providing both. So, it can a great investment option provided you choose the right funds. The REITs are pretty new in the country but the growth in the real estate sector is driving them and making them popular with time.
If you are looking for a comprehensive financial services and protection services , do consider Tata Capital Wealth for exclusive wealth management services aligned with your financial requirements.
06 July 2021
5 mins read
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