How to invest in real estate through Real Estate Investment Trust’s
A real estate investment trust's (REIT) is a trust that purchases a portfolio of income-generating real estate assets such as commercial and residential real estate.
Real estate is one of the favourite investments for Indians
Gold, bank fixed deposits, and real estate are among the favourite traditional investments for Indians. Apart from staying purpose, many people prefer to invest in real estate for regular monthly rental income and capital gain at the time of sale. Earlier, an investor could invest in real estate through the traditional route of buying a plot or under-construction property or a ready-to-move-in property. Since the last couple of years, an alternative route of investing in real estate has emerged: real estate investment trusts (REITs). In this article, we will understand how to invest in real estate through REITs but before that let us list some of the challenges about investing with buying real estate through the traditional route
Challenges with buying real estate through the traditional route
Buying real estate through the traditional route is not everyone’s cup of tea due to the following reasons:
- Huge down payment of up to 20% of the property value
- It requires many people to bear the burden of home loan EMIs for the remaining amount (apart from down payment) for a tenure of up to 20 years
- Lots of paperwork. Many a time ascertaining the clear title of the property is a challenge in itself
- Once you buy the property, it entails maintenance which can be a costly affair
- If you give it on rent, you need to deal with tenants. Some of them can create problems
- Selling real estate can be time-consuming as it is illiquid and involves a lot of paperwork
- Understanding the taxation (capital gains) can be complex
You can eliminate all of the above challenges by investing in real estate through REITs. In fact, investing (buying) and selling real estate through REITs can be done by clicking a button. So, let us understand what REITs are and how they work.
What are REITs?
A real estate investment trust (REIT) is a trust that purchases a portfolio of income-generating real estate assets such as commercial and residential real estate. These assets include IT parks, industrial parks, office space, hotels, apartments, etc. These assets are rented or leased out to earn monthly rent.
How can you invest in a REIT?
To invest in a REIT, you need a Demat account. As an investor, you can invest in a REIT in 2 ways:
- Primary market: The REIT raises money from unitholders by issuing them securities in the form of units, like a mutual fund. The REIT comes out with an IPO. You can submit your IPO application. The minimum IPO application should be in the range of Rs. 10,000 – 15,000. Once the IPO closes, the allotments are made. If the issue is oversubscribed, then proportionate allotment is made. On the day of listing, the REIT units start trading on the stock exchange.
- Secondary market: If you don't get an allotment in the IPO or you decide to buy the REIT units later, you can do so from the secondary market. The units are bought and sold in the secondary market, just like equity shares. The minimum quantity that you can trade is 1 unit.
How do REITs invest in real estate
REITs have to follow certain guidelines while making investments in real estate assets. Some of these include:
- It has to invest a minimum of 80% of its money in real estate projects that have been completed and can be rented out for generating income.
- The remaining 20% of the money can be invested in under-construction properties, mortgage-backed securities (MBS), Government securities, money market securities, or other assets specified by SEBI.
How do investors make money from REITs?
Just like shares, you can earn money from real estate investment trust's in the form of dividend income and capital appreciation.
A REIT earns rent from its real estate assets. While this forms a major portion of its income, it may also earn some dividend and interest income from its other investments. As per SEBI guidelines, a REIT must distribute at least 90% of its net distributable cash flows (income – expenses) to its unitholders at least twice a year.
For example, Mindspace Business Parks REIT has declared dividends on a quarterly basis since its listing. It declared a dividend of Rs. 4.6 in August 2021, Rs. 4.81 in May 2021, and Rs. 4.78 in February 2021.
The units of a REIT are traded like shares on the stock exchanges. The value of the units traded goes up and down depending on the income of the REIT, the value of the underlying assets it holds, the demand and supply of the REIT units, etc. The difference between your REIT units’ buying price and selling price is your capital gain/loss.
For example, the Mindspace Business Parks REIT Ltd. came out with its IPO in July 2020. The IPO price was fixed at Rs. 275/unit. As of October 2021, the shares are trading at a price of Rs. 331/unit. Thus, investors are sitting on an overall gain of 20% which does not include the dividends paid so far.
Taxation of REITs
The capital gains made on a real estate investment trust's unit are taxed based on the time duration for which it is held.
- Long term capital gains (LTCG) tax: If a REIT unit is held for more than 36 months, the capital gain on it is classified as long term capital gain (LTCG). The LTCG tax is charged at 10% on capital gains exceeding Rs. 1 lakh.
- Short term capital gains (STCG) tax: If a REIT unit is held for less than 36 months, the capital gain on it is classified as short term capital gain (STCG). The STCG tax is charged at 15% on the capital gains.
REITs listed in India
Currently, there are three REITs listed in India: Embassy Business Parks REIT, Mindspace Business Parks REIT, and Brookfield India REIT. Since Embassy Business Parks REIT is India’s first publicly listed REIT, let us explore some details about it.
Embassy Business Parks Real Estate investment Trust
Embassy REIT is one of the biggest REITs, with a commercial real estate portfolio of 42.4 million square feet (as of October 2021). Most of its assets are based in Bengaluru (72%). The remaining are spread across Mumbai, Pune, and the NCR region. It came out with an IPO in March 2019 and got listed on 3rd April 2019. The issue price was Rs. 300. As of 11th October, its unit price closed at Rs. 346.
Note: The above data is as of 12th October 2021
As an investor, real estate investment trust's can provide you regular income with quarterly or half-yearly dividends and hence can be compared to debt products. While REITs can also provide you capital appreciation, you cannot strictly compare them to equity because the nature of both financial products is different.
Asset allocation with Glide Invest App
While REITs are a good financial product to invest in, you need to follow asset allocation to diversify your investment portfolio as per your risk profile. Appropriate asset allocation includes investing in various asset classes like equity, debt, gold, real estate, etc. To understand your risk profile and to get recommendations for the appropriate investment products, you can partner with the Glide Invest App. You will get advice on how to plan and systematically invest towards your financial goals.
With Glide Invest, you will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved