Real Estate Investment Trust (REITs)
Real estate investment trusts or REITs are like mutual funds for the real estate sector. They collect funds from investors and put the money into real estate. The returns they earn from rental income and sale of property is distributed as dividends to investors. So retail investors can now invest in real estate without spending large sums of money. Plus REITs are listed on the exchange and can be freely bought and sold, so liquidity is pretty high too.
With REITs, investors can start with as small a sum as Rs 2 lakhs, to secure units in exchange. You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker. You can purchase shares of a non-traded REIT through a broker that participates in the non-traded REIT's offering. You can also purchase shares in a REIT mutual fund or REIT exchange-traded fund.
The REIT platform has already been approved by the Securities and Exchange Board of India (SEBI) and like mutual funds, it will pool the money from all investors across the country. The money collected from the REIT funds, will subsequently be invested in commercial properties to generate income.
Investing in REIT, can be compared to investing in gold bonds. Indians are partial to buying physical gold, rather than in gold bonds. Similarly, having one’s own property will always provide Indians with greater satisfaction, than mere paper investments. The Indian property market has almost stabilized. While it is human tendency to wait and watch, the bottom of the market cannot be fathomed accurately at the best of times. With the Union Budget 2017-18 clearly favoring first- time home buyers, 2017 may certainly be the year to make home ownership a reality.
REIT investing is still in its infancy in India since the first REIT came into being only in March 2019. But the road is open for others to follow. REITs can be a good investment opportunity, so you should know how to invest in REIT in India. Here are some pointers on how to invest in REITs, how much to invest in REITs etc.
1) IPOs: A new REIT comes out with an initial public offer (IPO) open to investors. You can apply for the IPO, and if your application is accepted you will be allotted units in the REIT. According to Securities & Exchange Board of India (SEBI) regulations, you will have to invest a minimum of Rs 2 lakh in the REIT.
2) Secondary market: After the IPO, the REIT will be available on the secondary market. That is, it will be listed on the stock exchange like shares. You can purchase them on the stock market too.
3) Choosing the right REIT: Like shares or equity funds, REITs are subject to market risk, so you must read the offer document carefully. While the real estate market has good potential, certain segments, like in some metros, could be saturated and scope for appreciation low. Make sure the segments the REIT is investing in has good potential, like some metro suburbs, affordable housing, smaller cities with growing industries etc.
4) Funds from operations (FFO): This is the cash flow of a REIT, calculated by adding depreciation to the REITs earnings, and deducting gains on sales. It is also calculated on a per share basis like FFO per share, similar to earning per share, and used to gauge a REIT’s performance.
5) How much to invest in REIT: That will depend on your risk appetite and investment goals. But REITs should be part of any well-diversified portfolio.
How does a REIT work?
REIT is a process to generate funds from a lot of investors, to directly invest in properties like offices, residential units, hotels, shopping centers, warehouses, etc. All REITs will be listed with the stock exchanges, as they would be structured like trusts. Consequently, REIT assets will be held with independent trustees for unit holders/investors.
