REIT – a Complete Guide into Real Estate Investment Trusts

REIT A Complete Guide

Index:

 

  • What exactly is a REIT?

  • What types of assets do REITs own?

  • REIT Varieties

  • How do REITs generate revenue?

  • Why should you invest in REITs?

  • What is the best way to invest in real estate investment trusts (REITs)?

  • REIT Restrictions

  • How can a corporation become a REIT?

 

What Exactly is a REIT?

 

‘REIT’ or ‘A Real Estate Investment Trust’ is a business that owns, manages, or funds income-producing real estate. 

REITs, like mutual funds, provide an investment opportunity that allows everyday Indians —not just rich people, banks, and hedge funds—to benefit from valuable real estate. It not only provides the opportunity to access dividend-based income and complete returns, but also enables communities to grow, thrive, and revitalize.

REITs have lately piqued the curiosity of Indian investors, who have a well-known passion for real estate. REITs are a kind of pooled investment entity that owns, operates, and finances income-generating real estate assets.

What types of assets do REITs own?

International REITs invest in a variety of Real-Estate property types. 

Like offices, apartment buildings, warehouses, retail spaces, medical facilities, data centers, cell towers, and hotels. 

 

Most REITs specialize in one type of property, while some have a diverse portfolio of assets.

However, According to SEBI laws, Indian REITs must invest at least 80% of their assets in established and income-generating assets. Currently, REITs can only invest in commercial real estate and office spaces.

REIT Varieties

Despite the fact that REITs may be divided into several sub-categories, there are three basic types and two extended types of real estate investment trusts:

5 types of REITs

Equity REITs – Equity REITs are real estate corporations that buy, manage, build, and rent out income-generating commercial buildings. 

 

Rents are the principal source of income for this real estate investment trust sector. The produced rents are subsequently dispersed to the stakeholders as dividends. 

 

Malls, office centers, and rental apartments are just a few examples.

 

Mortgage REITs (mREITs) – mREITs are corporations that finance income-generating businesses or invest in mortgage-backed securities. 

 

Mortgage loan interest is the main source of income for such REITs.

 

It is vital to highlight that mREITs are vulnerable to interest rate swings. Profits are often reduced if interest rates rise.

 

Hybrid REITs – Hybrid REITs are formed when a company invests in both mortgage- and equity-based REITs. 

 

Rents and interest-based income are generated by investors in this case.

India currently has just three REITs open for investment – Brookfield India Real Estate Trust, Embassy Office Parks REIT, and Mindspace Business Parks REIT.

Public Non-listed REITsNon-listed public REITs (PNLRs) are registered with SEBI but do not trade on national stock markets.

 

Private REITs – Private REITs are offers that are not required to be registered with SEBI and whose shares do not trade on national stock markets. These are less liquid and are not subject to major market fluctuations.

How do rEITs generate revenue?

Most REITs follow a simple and uncomplicated business model: by leasing property and collecting payments on its real estate, the corporation produces revenue, which is subsequently distributed to shareholders in the form of dividends. 

REITs must distribute at least 90% of their taxable earnings to shareholders, where a majority of them distribute 100%. Dividend income taxes are then paid by shareholders.

mREITs i.e mortgage REITs do not directly own real estate. Rather, they fund real estate and receive revenue from the interest on these assets.

Why should you invest in REITs?

REITs have typically provided competitive total returns via high, consistent dividend income and long-term capital appreciation. 

 

Because of their low correlation with other assets, they are an effective portfolio diversifier that may help lower overall portfolio risk while increasing returns. 

 

Hence, investing in REITs is generally a good idea, as it enables you to reap huge profits. But, if you’re looking for a different lower-risk option, then you could also consider directly investing in commercial real estate.

 

  • Invest in REITs with a diverse portfolio of properties and tenants.

  • Real estate investment trusts provide high returns due to long-term capital appreciation, so look for homes with a proven track record.

  • Before buying, you should profile the REITs by looking at measures such as Funds from Operations (FFO).

  • Strong management is critical in managing the company’s overall operations. As a result, search for organizations with an experienced and competent management team.

As a result, a real estate investment trust can open the way for a new class of real estate assets such as co-living or working spaces. REITs not only guarantee high-income returns, but they also provide a way for small retail investors to invest in high-value real estate projects if they are encouraged.

Disclaimer – Investing in stocks is a risky business. Hence, Investors are advised to do their own research before making a decision. The author, the brokerage firms, or Bridl360 are not responsible for any losses that may occur due to a decision based on the above article. 

Hence, Investors are advised to do their own research before making a decision. Please consult a professional advisor if you want to make a decision about stock investment.

What is the best way to invest in real estate investment trusts (REITs)?

REITs are among the most premium investments possible. They hold and manage high-value real estate assets. As a result, the investors who put their money into them are people who have more than enough capital. 

 

Massive institutions including insurance firms, bank trust departments, pension fund departments, and so on are examples of individuals that invest in them.

Stocks – Investing in real estate investment trusts through stocks is the most straightforward way to do so.

 

Investing in Mutual Funds – If you opt to invest in a real estate investment trust through mutual funds, you may greatly diversify your financial portfolio.

 

However,  It is an indirect investing approach; and investors must be guided by a proper mutual fund provider.

 

ETFs (Exchange-Traded Funds) – Investors that choose this kind of investment will have indirect ownership of the property and will profit from its diversification.

REIT Restrictions

Taxation of Dividends – REITs are not taxed at the corporation level since they pay above-average dividends. The drawback is that the dividends do not quite match the Indian Revenue System’s definition of qualified dividends, which are taxed at lower rates than ordinary income.

 

REITs are eligible for the new 20% pass-through deduction. This deduction was included in the Tax Cuts and Jobs Act. However, REIT dividends are taxed at a greater rate than eligible dividends. This is vital to remember if you hold your REITs through a conventional brokerage account.

Sensitivity to Interest Rates – Another disadvantage is that REITs are particularly sensitive to changes in interest rates, and rising interest rates are unfavorable for REIT stock values. When the rates on risk-free investments such as Treasury securities rise, so do yields on other income-producing investments.

 

Long-Term Investing – Because REITs are best suited for long-term investments. Aside from interest rate fluctuations, a variety of other factors have a short-term impact on REIT values. It is recommended that you do not invest any money that you will bring in the next couple of years in REITs since a longer period of time is preferable when it comes to REITs.

Land Liabilities – While REITs bring a lot of variety to your portfolio, keep in mind that most single REITs are not extremely diversified because they tend to specialize in one specific property type, and each property type has its own set of risks and downsides.

How can a corporation become a REIT?

The idea of real estate investment trust was first established by the Securities and Exchange Board of India (SEBI) in 2008. However, it wasn’t until last year that India’s first REIT, The Embassy Office Parks, was established.

 

SEBI has ordered that REITs be listed on stock markets and obtain funds through an Initial Public Offering (IPO).

 

There are a few rules that need to be complied with before a corporation can become a REIT, and they are as follows: 

 

  • A minimum of 80% of the capital can be invested in rent-generating and finished properties.

  • A maximum of 20% of the total amount can be invested in other assets.

  • The REIT’s asset base should be at least Rs 500 crores.

  • A single REIT cannot invest in the units of another REIT.

  • A minimum of 200 investors is necessary, while no maximum number has been established.

That’s it for today. Kindly like, share, or subscribe to stay tuned for more content from Bridl360.

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