EXPLAINED: Why does it make sense to invest in real estate via REITs

EXPLAINED: Why does it make sense to invest in real estate via REITs

Real Estate Investment Trusts prove to be a viable option for those who wish to expand their portfolios beyond stocks; while helping them retain flexibility because of their high liquidity, unlike real concrete assets.

EXPLAINED: Why it makes sense to invest in real estate via REITs (Photo: Reuters) EXPLAINED: Why it makes sense to invest in real estate via REITs (Photo: Reuters)

Investing in Real Estate through Real Estate Investment Trusts (REITs) is increasingly becoming an option for such investors who want to expand their portfolio with exposure to real estate, yet want to retain flexibility. While investing in prime-location property may not fit every pocket, REIT allows one to easily participate in the real estate sector. Experts tell Business Today, why they are becoming significant for investors.   

Different risk-matrix  

Investing in REITs is a way to diversify one’s portfolio. For those looking for an exposure in real estate, REITS offers both variety and flexibility.  


Piyush Gupta, Managing Director, Capital Markets and Investment Services, Colliers India said, “Investment in REIT offers a different risk-return matrix compared to other investment asset classes. The income of REIT is generated from a pool of income from income-generating assets such as commercial offices, hotels, retail malls, warehouses, and data centers that offer regular fixed income. REITs are mandated to distribute 90 per cent of the income it receives to investors thereby providing stable and consistent yields quarterly basis to the Investors. REITs are listed and hence offer liquidity to the investors as compared to traditional real estate and are much less capital intensive in nature”   


REITs in India  


It is because of its flexibility added with the opportunity it offers in growth that REITs are increasingly becoming popular instruments for investments. While already established globally, REITs are comparatively new in India. Rishad Manekia, Founder and MD, Kairos Capital says, “There are now three REITs that are listed on the Indian bourses and more to come in the pipeline. REITs are becoming popular because of the benefits that allow retail investors to be able to invest in properties that would otherwise be inaccessible to them. REITs are set up as trusts that pool together money from investors and then into income-producing real estate.”  

The structure of REITs is similar to that of a mutual fund having a sponsor, an asset manager, and a trustee. Manekia explains, “Typically, REITs invest in commercial properties because of their ability to earn regular income from rent. When compared with traditionally buying a commercial property, a REIT is diversified across multiple properties, has a lower ticket size, better liquidity,  and doesn’t have the headaches of registration and maintenance because it is professionally managed”.    


Investment for deep pockets  


Getting on board is more expensive in REITs than other investment instruments. Investment Advisor Sanjeev Govila says, “Investing in physical real estate and investing in REITs are very different, especially when it comes to investment amounts. Whether you plan to invest in a residential house or a commercial space, you need to have deep pockets. For investing in REITs, the ticket size could be as low as Rs 50,000, and the minimum investment is even much lower when it comes to Real estate funds. Besides that, transaction cost, returns, ease of investing, taxation, and other factors make these products different, although underlying assets remain real estate. Depending on the individual’s objective of investment, asset allocation, availability of funds, and other factors, a decision should be made.”  

Launched in 2019, Indian REITs have already emerged as a viable investment alternative that helped retail investors while outperforming other financial products. REITs have outperformed the BSE index, the Realy index, and several small, mid and large-cap mutual funds. All three Indian REITs – the Embassy Office Parks REIT, the Mindspace Business Parks REIT, and the Brookefield India REIT have performed consistently. As most experts agree, for the variety, flexibility, and growth opportunity they offer, REITs are here to stay in India. 


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