Real Estate Investment Trusts (REITs) are entities that own, operate or finance income-generating real estate.
REITs are derived from mutual funds. It can be a great way for investors to pool their capital. REITs make it possible for investors to earn dividends from real estate investments without worrying about having to buy, finance, or manage any properties themselves.
- A REIT must invest at least 75% of its assets in cash, treasuries, or real estate, according to the SEBI regulation.
- REITs must pay shareholders dividends that are at least 90% of their taxable income.
- Investors can get monthly dividends and/or interest payouts, providing consistent income, while also receiving capital gains through the sale of REIT units on stock exchanges.
- REITs trade on public markets; they are simple to buy and sell, which helps to offset some of the traditional real estate disadvantages.
Advantages of REITS
- Liquidity: Most of the REITs trade on public stock exchanges, which are easy to buy and sell, which adds to their liquidity aspect.
- Diversification: REITs allow their investors to diversify their real estate holdings, as REITs are usually traded on stock exchanges.
- Balanced Dividend Income: It is said that investing in REITs can provide substantial dividend income as well as a stable capital appreciation for investors over the long term.
- Transparency: REITs are required to file financial reports that are examined by professionals as they are regulated by SEBI, which allows investors to be aware of information like taxation, zoning, and ownership. This makes the whole process quite transparent.
- Safety: Investing in REITs makes investors accrue risk-adjusted returns and steady cash flow.
Limitations of REITS
- No Tax Benefits: The dividends earned from REITs are subject to taxation, so when it comes to tax savings, REITs are not much help.
- Market-linked risks: REITs are liable to be influenced by market movements, and this can be a major risk for investors, as they may receive less than they originally paid for their shares if they sell them on the public exchange.
- Low Growth Expectations: The acknowledgment of capital in the case of REITs is a bit low because they mainly return 90% of what they have invested to the investors and the rest, 10%, is reinvested in the venture.
Factors to Consider While Investing in REITs
- Portfolio Occupancy Percentage: You should find out what percentage of the completed area is rented out. The occupancy rate is a good indicator of the stability and success of the portfolio.
- Tenant Quality and Sectoral Diversification: A strong tenant in a booming sector (IT, Pharma, Manufacturing, etc.) matters, as that reduces vacancy risk as well as the risk of paying rentals late.
- Number of Tenants: The larger the number of tenants, the more diversified you are as an investor.
- Geographical Diversification of Portfolio: REITs owning assets in different micro markets or cities are better.
- Dividend Yield: This shows the health of the managing entity and the portfolio.
- Past Stock Performance: Evaluate past performance and increase in stock price over one year, six months, and three months.
- Growth in Revenues and Profits of the REIT: There are some big differences due to the accounting treatment of the property.
- WALE (weighted average lease expiry): This is the average lease tenure remaining for the tenants occupying the buildings that make up the REIT.
Risks Involved By Investing in REIT
- Liquidity Risk: Public REITs allow the investors to sell their shares on the public exchange market, but the investments are less liquid in comparison to the other investments in the market as the liquidity is only provided through the fund repurchase offers and there is no inferior market for buying and selling the properties.
- Financial Risk: The investors decided to buy securities with borrowed funds. The use of the financing can cause the REIT to experience additional expenses and increase the fund’s losses in the event of underperformance.
- Market Risk: As we discussed above in the article, market risk is one of the major limitations and risks of REITs. The investors may receive less in comparison with what they have paid originally if they sell their shares in public exchange.
4 ways of earning from the REIT
Interest is taxed as per the income tax slab.
Dividends: Some are taxed, and some REITs are not taxed.
Amortization of SPV (return of capital)—non-taxable
Short-term (36 months): 15% of capital gains
Long-Term (>=36 months): 10% of capital gains, over 1 lakh.
Popular REITs in India
Embassy REIT owns and operates a 42.4 million square foot (“MSF”) portfolio of eight infrastructure-like office parks and four city-center office buildings.
Brookfield India Real Estate Trust (REIT)
Brookfield India Real Estate Trust (REIT) is a commercial real estate vehicle established in India.
⦁ Properties in Mumbai, Kolkata, Gurugram, and Noida
⦁ In the NCR, 56% of its total assets are located.
⦁ Tenants are blue-chip companies like Accenture and TCS.
⦁ Debt is relatively high at 7.15%, but it’s coming down.
K Raheja Corp Group is the sponsor of Mindspace REIT. With a total leasable area of 30.2 m2, it has a solid portfolio of office spaces across Mumbai, Pune, Hyderabad, and Chennai. Mindspace Business Parks REIT, which is sponsored by K. Raheja Corp. and Blackstone Group,
|Embassy REIT||Brookfield India Real Estate Trust (REIT)||Mindspace REIT|
|Gross Distribution Yield (The year 2023)||8.38%||9.12%||5.96%|
|Dividend Yield (The year 2023)||₹ 26.56/-||₹25.3/-||₹317/-|
Which Is The Best REITs to Invest In?
These three trusts are reputable, well-managed REIT trusts in India with comparable long-term growth prospects. Additionally, they make some resounding claims regarding their financial standing.
But if we carefully examine these REITs’ performance metrics, we can see that some of them perform better than others.
Brookfield REIT has the highest occupancy rate and dividend yield of the three trusts. In comparison to Mindspace, Brookfield, and Embassy REITs are more significant in Bangalore (74% of GAV) and NCR (67% of GAV), while Mindspace is more diverse throughout all four main cities. In comparison to other REITs, Mindpace REIT has the largest tax-free distribution (92%). Of the others, its LTV (16.8%) is the lowest.
The perception of an investor may have an impact on the choice. The Mindspace REIT is a well-diversified trust with the largest tax-free distribution that is suitable for HNIs as a good long-term option if you are conservative and take debt investors. If you want your investment to grow in value, go with Brookfield REIT. Taking into account all the significant data, BRIET has a greater likelihood of growing during the following two to three years. Analysis of all the data throughout the years reveals that Brookfield REIT has experienced superior growth and respectable cash flow stability. The Capitalmind figure below demonstrates that, of the three trusts, BRIET is the best choice.
Like a coin with two sides, REITs offer certain benefits and drawbacks. Although it carries some risk, investing in REITs can be lucrative. If you are considering investing in REITs, PropertyWala advises that you check over the research we have done for you to make your task easier. It is highly important to consult an advisor before investing.