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Real Estate Investment Trust

Governments put great focus on infrastructure development and real estate when the economy is doing well. Real estate investment trust becomes vital as they give opportunities to investors to invest in the real estate sector. Furthermore, investors can get exposure to this sector and generate good profits.

Real estate investment trust meaning

A real estate investment trust is a company that is the custodian of real estate and runs it to generate an income. Moreover, real estate investment trust companies are enterprises that manage the portfolio of high-value real estate properties. They can also mortgage properties in addition to this. Leasing properties to earn revenue is also a strategy.

REIT offers investors a share in the trust. Consequently, investors can reap profits from investments. Properties in such a project may include apartment complexes, data centers, etc. REIT provides portfolio diversification and capital appreciation. Real estate investment trusts are a legal way of investing in the real estate sector.

How does a real estate investment trust work?

Undoubtedly, Real estate investment trust gives a profile diversification to the investors. They can make investments in real estate funds. REIT’s are of two types, Equity REIT and MREIT. Equity REITs hold properties in the vicinity like hotels, offices, and other large facilities and earn their revenue from rent. In contrast, MREIT’s finance the properties like residential or commercial and earn income from interest through mortgages.

REITs offer easy liquidation of investments in the property markets. The growth story of a nation dependent on infrastructure development gives a boost to the economy and growth. REIT backed investments help in channelizing them legitimately as the structure is strong. The prime focus of REIT investments in India is to make the platform robust and transparent.

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How does a company qualify as REIT?

The criteria are:

  1. Firstly, an entity has to be a business.
  2. Secondly, a minimum of 100 shareholders.
  3. Thirdly, offers fully transferrable shares to investors.
  4. Subsequently, managed by a board of directors or trustees.
  5. Also, 90% of taxable income paid as dividends.
  6. Collect 75% of gross income from the mortgage.
  7. 20% of the entity's assets are under taxable REIT subsidiaries.
  8. Finally, a total investment of 95% is mandatory.

Types of real estate investment trust

1. Equity REIT: In addition to being the most popular REIT, this is based on operating and handling income-generating commercial properties and resources. Rent is the most common source of such revenue.

2. MREIT REIT: Also known as mortgage REIT. It lends money to proprietors and provides mortgage facilities. Mortgage-linked properties are acquired. Income from interest is also a form of revenue.

3. Hybrid REIT: Hybrid REIT’s extend the facility of portfolio diversification to investors as they invest in equity REIT and REIT. In conclusion, rent and interest are the forms of income from this type of REIT.

4. Private REIT: This facility is tailor-made for only a select group of investors. They are not traded on the NSE and neither registered with SEBI.

5. Public traded REIT: The shares of these REITs are enlisted with the NSE and regulated by the SEBI. Retail investors can buy or sell these shares through the NSE.

6. Public non-traded REIT: These are not traded on the NSE. SEBI regulates them. In contrast, they are less liquid. Market fluctuations do not affect them.

Real estate investment trust

Advantages of REITs

  • In comparison to a direct investment in property, REITs do not require much capital. However, it is not an attractive source at the moment.
  • REITs are well-regulated by the Securities and Exchange Board of India and hence the chances of fraud are negligible.
  • It is an easy route to invest in Real estate through REIT.
  • They carry a low liquidity risk.
  • They maintain transparency as annual portfolio disclosures is mandatory.
  • It disburses 90% of the income. Investors can get a higher dividend.

Limitations of REITs

  • Zero Tax Benefits: Practically there is no concession for REITs in regards to tax savings. Dividends earned from REIT companies are subject to taxations.
  • Minimal Growth Prospects: REIT’s are not of much help in capital appreciation. In addition, they return 90% of the dividend earned to the investors and reinvest only 105 back into the scheme.
  • Market-centric Risks: REITs are subject to market fluctuations. Low-risk appetite investors should consider the pros and cons of the investments before opting for REIT.

Real estate investment trust taxation

  • REIT’s have exempted status under section 10(23FC). Interest received or to be received from SPV(Special Purpose Vehicle) or dividend mentioned under section 115(O)(7) of the act.
  • Total income may include interest and dividend income from SPV, rental income if it comprises of rent-generating assets. Capital gains under section 111A and 112.
  • The income of a business trust by mode of renting or leasing any property which the trust owns is not part of the total income under section 10(23FCA).
  • Pertaining to provisions under section 111A and 112, the total income of a trust shall be taxed at Minimum Marginal Rate (MMR=30% + applicable surcharge & cess).
  • Specified domestic company to a business trust will not be taxed on its current income, on or after a mentioned date under section 115(O)(7).
  • No taxation of the dividend declared, dispensed, or paid by the specified domestic company out of its profits up to a mentioned date.
  • To ascertain taxation of dividends from SPV section 115(O)(7) has to be read with section 115BBDA.
Why you should Include REIT in your portfolio_ (1)

Why you should Include REIT in your portfolio?

  • Diversification Buffer: In contrast to stocks, REIT’s follow a different cycle. Real estate investment trusts (REITs) follow a real estate cycle (18 years) as opposed to the economic business cycle(56 months). When stocks crash in a recession, REITs would do well and even out of the portfolio.
  • Good Yields: REITs provide higher yields. Expected yields are around 7 to 7.5%.
  • Inflation: As inflation increases, rent and leases increase as well. This is a benefit of REITs.

How to invest in a real estate investment trust?

There are 3 approaches to make an investment in REITs:

  • Stocks: Investors who want a direct route to invest in REIT’s can opt for stocks.
  • Mutual Funds: This will diversify your portfolio. It reduces risks as you invest through a mutual fund company that invests a part of your money into REITs.
    (click here to know about different types of mutual funds)
  • Exchange-Traded Funds: This option gives investors indirect ownership of properties. It will also diversify your portfolio.

Conclusion

Indeed, REITs are a good investment option if you have weighed the risks and returns thoroughly. Over the past few years, real estate investment trusts in India has seen tremendous growth. There are various types of REITs like Equity, MREIT, Hybrid, etc.

Moreover, Real estate investment trust companies in India are aplenty and are considered a good growth venue. RERA is an important milestone for the real estate sector. It has ushered transparency in the dealings and expedited the completion of projects. The sector remains a great opportunity for investors to earn profits. REIT is a good vehicle to invest in this sector.

Want to invest in REITs?
Enter your details and request a FREE ADVISORY CALLBACK

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