The level of versatility which you can find in India when it comes to the world of investing is quite immense.
REIT is an interesting phenomenon for investing that most Indian investors consider to be a safe platform so let’s learn more.
What is REIT?
REIT stands for Real Estate Investment Trust and it is an entity that is formed to channel funds that can be invested into financing or owning real estate which provides a source of income.
Imagine yourself standing outside a candy store. You want to go in and purchase all of the candy but you can’t do that so what if you were told that you could have a minimum of 10 candies at the store?
In doing so you will end up literally owning that part of the store and keep getting more candy as the value of that store increases. Real Estate Investment works in exactly the same way.
Many individuals want to buy properties across various different locations in India to avail and get access to great rental yields, however, at times realistically, neither do we have the money to invest in them nor do we have the time or the patience. This basically means to face problems and hassles where the maintenance of the property and ensuring that regular rent is received from the tenants is involved.
What is the History of REIT?
Back in 1960, REIT was formed in the USA under the Cigar Excise Tax Extension Act and it was listed on the New York stock exchange in 1965. In the years that followed, REIT started getting listed on the stock exchanges in several different European countries, Japan and even in Australia.
It came to India 50 years later. REIT entered India at a later pace than most other countries. The Securities and Exchange Board of India which is also known as SEBI, introduced them in our country in the year 2007. It was a known fact that any concept was obviously going to take time to fork its way into the Indian real estate industry. There were delays that occurred and SEBI had drafted a few regulations but they imposed certain limitations and the idea never took flight. After a few years in 2013, SEBI revised its rate regulations which ultimately got green lighted the upcoming year on September 26th 2014.
The most critical condition put forward by SEBI for obvious reasons was that unlike other countries which consisted of residential and commercial real estate, Indian REIT was exclusively for commercial real estate.
How does a company qualify as a REIT in India?
SEBI constantly amends its guidelines as per the REIT involved.
- In order for an asset to be able to qualify as a Special Purpose Vehicle, controlling interest is held by REIT and at least 50 percent of the total nominal value of the equity which is present in that SPV.
- 80 percent of the investment has to be made in income generating ready assets such as commercial real estate, malls, etc and only twenty percent of the entire total investment can be made under construction assets.
- Reduction in trading lot size from rupees one lakh to rupees fifty thousand might make SEBI slash the minimum amount from rupees 50000 to a lower amount for retail investors.
- Promoters that own 25 percent of voting rights are allowed to increase the stake up to 10 percent against five percent which was present before.
- Recently, SEBI announced that the minimum investment has been reduced to 200 units from the previous 800 units.
What are some restrictions that have been laid down by SEBI?
- Investments cannot be done by Indian REIT in vacant land, agricultural land, mortgage backed securities and foreign assets.
- It is mandatory for them to distribute a minimum basis of 90 percent of the taxable income every year in the form of interest or as dividend to the unit holders. This means that if their taxable annual income is rupees 100, they will have to give out rupees 90 to the investors.
How can individuals start investing in REIT?
Many different methods can be used to invest in REITs and this includes the purchasing shares of publicly traded right stocks, mutual funds and exchange traded funds. Checking and looking into the occupancy level of the commercial real estate properties of the REIT before jumping into making an investment is important.
- In India it is mandatory for REIT investors to have a demat account. This demat account needs to be linked to the individual’s bank account. The IPO which is required can be selected from the range of options that are available.
- One of the three ways that investors can buy shares in a REIT is through stocks as this is a direct method of investing.
- The second way would be through mutual funds where investors can choose to diversify the portfolio they have in place. It is an indirect method of investing and they can invest in this fund by using a mutual fund company.
- When it comes to exchange traded funds, which is a very popular option of investment, indirect ownership of properties as well as the diversification present are some benefits.
Financial advisors can be used to make better decisions on what the right type of REIT investment is for specific investors.
What are the Advantages of REIT?
- Exposure to real estate can be gained by investors with small amounts of money as low as rupees 2 lakh
- Wider investment opportunities are provided for investors beyond debt, money market, equity and commodities.
- It is easy to purchase and sell them which adds to the aspect of their liquidity.
- As REITs are mainly projects which have already been built, it is a safe investment and everything is presented in a transparent manner with nothing being hidden from the investors.
- Options can be provided for investors to diversify their real estate as trading is frequently done on the stock exchanges present.
- Steady cash flow can be generated with risk adjusted returns even if the inflation rate has risen up.
What are the Disadvantages of REIT?
- There are fluctuations in the market where it is very risky and investors who cannot handle losses should make sure they’ve checked up on the return generating capacity.
- It is not very beneficial when it comes to saving taxes.
- Due to the ticket size which is very large, it may be difficult for investors to exit even if the market is performing well.
- The growth prospects are quite low as only about 10 percent is reinvested into ventures.
Some important tips for REIT investments
- Corporations which have a good record of offering high dividend yields should be considered by investors.
- When it comes to providing capital appreciation, the role of the developer is important and this can also consist of investors that can diversify the investment portfolio that is available by buying shares through stock exchanges.
- ETFs and mutual funds are options that come with professional help so this is a good choice that investors should opt for.
- Going for companies that have been around for many years with a skilled and experienced team would definitely be a benefit.
A commerce graduate who is on a mission to educate people about investment and personal finance.