REITs or Real Estate Investment trusts are picking up steam in India. They are regulated by the SEBI in India, and currently around three of them, along with two other IIT – infrastructure investment trusts, are listed on the exchange.
What are REITs?
Real estate investment trusts are companies that own, manage, and operate commercial real estate that produces some form of income through finances pooled in from investors. You do not have to own a piece of real estate in a prime IT park, you can invest in a REIT that does it and earn dividends from the returns.
It is like investing in the debentures or bonds but on real estate terms, says a senior consultant from Golden Homes Phase III.
Do REITs give returns?
REITs are considered one of the best performing asset categories. It allows every investor, big and small, corporate and individual to own shares in commercial real estate. It works similar to mutual funds, with minimum asset size as designated by SEBI being 500 crores. Investors pitch in, and stock units are allotted.
But a word of caution. Do research thoroughly before diving in!
Types of REITs:
Though the REIT sector in India is at a nascent stage, world wide they are an established investment form. They can be broadly classified into five major types.
These are the most popular REIT investments and can be seen in investments made in shopping centers or other retails commercial spaces. In the USA, most shopping malls are owned by an REIT. These REITs make money by charging their tenants for space they use. However, this sector has taken a hit during COVID-19. The REIT also faces issues with tenancy, when rents are not paid on time, or in finding a new tenant. Another growing concern in this space is the trend of online shopping, which has seen reduced footfall in retail stores. A good idea is to look for REITs who invest in recession proofed anchor tenants like grocery, FMCG chain stores or non-retail office spaces.
This is a bit like crowdfunding for residential apartment complexes. Practically non-existent in India, these are common in the Western economies where multi-family rental apartment buildings or manufactured housing exist – a corporation owns and rents out units to individuals. It goes without saying that REITs that invest in high rental income areas like cities are the ones that fetch most returns. However recent trends of hybrid working spaces, where you can work from anywhere has translated into a dip in the premium residential space. That said, as long as residential apartment supply is low demand is high, these REITs will fetch good returns.
Healthcare as a sector has seen exponential growth in the last decade. In a immature and unorganized healthcare market like India, healthcare REITs are a great space to invest in. Healthcare REITs invest in medical centers, hospitals and hospices, geriatric health care facilities, nursing homes etc.,
Office REITs, like the name suggests invest in office buildings. Consider IT parks, large office buildings etc. How these differ from retail commercial spaces is the fact that they are long term leases. But then again, this space has taken a massive hit thanks to the pandemic.
This one does not exist in India but is a big thing in the American REIT market. Remember the subprime crisis? This is related to that. What mortgage REITs essentially do is invest in mortgages instead of physical spaces. This has its own perks and downsides including regulatory reforms, interest rates and economic outlook.
Viewing a REIT:
Keep the following things in mind while investing in REITs, advises a property consultant from Golden Panorama:
These are long term capital appreciative investments.
Since REITs are traded on stock exchanges, your investments are liquid
These are pretty volatile. They can be started with investments as low as 2 lakhs.
REITs are pretty new to India, despite the idea itself being old. You can expect consistent dividends on half yearly basis. The Indian realty market is inherently fragmented, and there are just a handful of REITs registered on the NSE as of date. Look for REITs that diversify their portfolio and do not just look at the returns. For example if a REIT is putting all its funds into a project that is yet to be started, that is a red flag. The risk is mitigated when asset distribution is better with a balanced ratio of completed ongoing and revenue generating projects. There are REITs which also invest in government back infrastructure.