Real Estate Investment Trust (REIT): How to invest in them

A Reit India is a corporation that owns manages or funds assets that produce revenue. REITs provide investors with a consistent income stream but little in the way of capital appreciation. The bulk of REITs are traded on the stock exchange, making them extremely liquid (unlike physical real estate investments). Apartment buildings, cell towers, data centers, hotels, medical facilities, offices, shopping centers, and warehouses are all forms of real estate that REITs invest in.

What are Real Estate Investment trusts?

Real Estate Investment trusts can be described as a company that owns and operates real estate to generate income. Real estate investment trust companies are corporations that run portfolios of high-value real estate properties as well as mortgages. For instance, they lease properties as well as collect rent. The collected rent is later distributed among shareholders as income as well as dividends. Normally, Reit India offers investors an opportunity to possess high-priced real estate as well as enable them to earn dividend income to boost their capital eventually. This way, investors can utilize the opportunity to appreciate their capital as well as generate income at the same time. Both large as well as small investors can park their funds into this investment option as well as reap benefits accordingly. Small investors may attempt to pool their resources along with other investors as well as invest the same into large commercial real estate projects. Properties included in Real Estate Investment Trusts comprise data centers, infrastructure, healthcare units, apartment complexes, etc.

Who can invest in Reit India?

All classes of investors can invest in units of Reit India trust unless restricted by any other rule leading such investor, which comprises the following:

• Mutual funds (within maximum limit)
• Insurance companies/insurer (subject to certain conditions)
• Banks
• Strategic Investors4 such as – Infrastructure finance company registered with RBI as a Non-Banking Financial Company; – Scheduled Commercial Bank; – International multilateral financial institution; – Systemically important NBFCs registered with Reserve Bank of India; as well as – foreign portfolio investors.

How Does a Company Qualify as a Reit India Trust?

To qualify as a Real Estate Investment Trust, a company has to meet certain requirements as mentioned below.

1. The entity needs to be structured as a business trust as well as a corporation.
2. Encompasses fully transferable shares.

III.       Is managed by a team of trustees as well as a board of directors.

1. Must have a minimum of 100 shareholders.
2. Less than 5 entities should not have held 50% of their share during each taxable year.
3. Is obligatory to pay at least 90% of the taxable income as a dividend.

VII.     Accumulate a minimum of 75% of gross income from mortgage interest as well as rents. VIII.    A maximum of 20% of the corporation’s assets encompasses stock under taxable REIT India subsidiaries.

1. A minimum of 75% of investment assets is required to be in real estate.
2. A minimum of 95% of Real Estate Investment Trusts' total income should be financed.

Types of Reit India

In a broader sense, the types of business Real Estate Investment Trusts are involved with tend to help categorize them better. Similarly, the methods devised to sell and purchase shares further help categorize Real Estate Investment Trusts. The following is a list of the different types of Real Estate Investment Trusts.

Equity

This type of Real Estate Investment trust is among the most popular ones. Characteristically, it is concerned with operating as well as managing income-generating commercial properties. Conspicuously, the common source of income here is rents.

Mortgage

Also known as Mortage Real Estate Investment trusts, it is mostly involved with lending money to proprietors as well as extending mortgage facilities. Additionally, Real Estate Investment trusts tend to acquire mortgage-backed securities. Mortgage Real Estate Investment trusts also produce income in the form of interest accrued on the money they lend to proprietors.

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          Hybrid

This option allows stakeholders to expand their portfolio by parking their funds in both mortgage Real Estate Investment trusts as well as equity Real Estate Investment Trusts. Henceforth, both rents, as well as interest, are the sources of income for this particular kind of Real Estate Investment trust.

          Private Real Estate Investment trusts

These trusts function as private placements, which accommodate only a selective list of investors. Characteristically, private Real Estate Investment trusts are not traded on National Securities Exchanges and are not registered with the SEBI.

          Public non-traded Real Estate Investment trusts

These are non-listed Real Estate Investment trusts that are registered with the SEBI. Though, they are not traded on the NSE. Correspondingly, when pitted against public non-traded Real Estate Investment trusts, these options are less liquid. Also, they are more stable because they are not subjected to market fluctuations.

Advantages of Reit India

Investors who park their funds in Reit India can benefit in the following ways.

• Steady dividend income, as well as capital appreciation: Investing in Real Estate Investment trusts, are said to provide substantial dividend income as well as also allows steady capital appreciation over the long term.
• Option to diversify: Since most Real Estate Investment trusts are traded frequently on the stock exchanges, it provides investors with a prospect to diversify their real estate.
• Transparency in dealing: Being controlled by the SEBI, Real Estate Investment trusts are obligated to file financial reports audited by experts. It offers investors an opportunity to avail data on topics like taxation, ownership, as well as zoning, hence making the entire process transparent.
• Liquidity: Most Real Estate Investment trusts trade on public stock exchanges and hence are easy to buy and sell, which adds to their liquidity aspect.
• Accrues risk-adjusted returns: Investing in Real Estate Investment trusts offers individuals risk-adjusted returns and helps generate steady cash flow. It aids them to have a steady source of income to rely on even when the rate of inflation is high.

Limitations of Real Estate Investment trusts

• No tax benefits: When it comes to tax savings, Real Estate Investment trusts are not of much help. For instance, the dividends earned from Real Estate Investment companies are subjected to taxation.
• Market-linked risks: One of the major risks associated with Real Estate Investment trusts is that it is susceptible to market-linked fluctuations.
• Low growth prospect: The outlook of capital appreciation is quite low in the case of Real Estate Investment Trusts. The table highlights the pros as well as ascons of investing in top Real Estate Investment Trusts.

Pros	Cons
Liquidity	Lack of tax benefits
Option to diversify	Market risk
Transparent	Low growth prospect
Risk-adjusted returns	High maintenance fee
Steady dividend income	Other additional charges

Since Real Estate Investment trusts own as well as manage high-value real estate properties, they are one of the most expensive avenues of investment. Consequently, investors who park their funds in Real Estate Investment trusts are those who have substantial capital at their disposal. For example, large-scale established investors like insurance companies, endowments, bank trust departments, pension funds, etc. can suitably invest in these financial tools.

Role of Real Estate Investment trusts in a Retirement Portfolio

In what ways do Real Estate Investment trusts tend to benefit investors a variety of ways. The subsequent pointers help gain valuable insight into the same. Exposes portfolio to a diverse mix of properties By including real estate, one can diversify his/her asset classes significantly as well as does not require managing them personally. Moreover, with diversification, price fluctuation of other investment options should not have an impact on Real Estate Investment Trusts. Rather, it can be said that in a falling market, the value of Real Estate Investment trusts does not drop as fast as stocks.

Opportunity to generate earnings

When the value of Real Estate Investment trust appreciates, investors tend to earn substantial returns. Correspondingly, these companies are required to distribute as much as 90% of their taxable earnings to their shareholders, serving as an avenue to generate steady income.

Reit funds are Suitable for the long run

Unlike stocks and bonds which follow a business cycle of 6 years, Real Estate Investment trusts are more in sync with the movement of the real estate market. Conspicuously, such movement tends to last for over a decade as well as are further suitable for investors who are looking for a long-term investment horizon. In turn, it proves to be a money-making investment avenue for retirement planning. As per research, Real Estate Investment trusts enable investors to hedge the effects of inflation in the long run. For example, by staying invested for a term of 5 years, investors can protect their funds from inflationary effects more effectively as compared to stock options.

How to Invest in Real Estate Investment Trusts?

Like popular public stock, investors may decide to buy shares in a particular Real Estate Investment Trust that is enlisted on the major stock exchanges. They should do so in the following three ways.

• Stocks: Individuals who are looking for a more direct way to invest in Real Estate Investment trusts should consider doing so through stocks.
• Mutual funds: By choosing this option, individuals would be able to expand their investment portfolio pointedly. As it is a secondary investment method, investors would be required to invest in such a fund through a mutual fund company.
• Exchange-traded funds: With this particular investment option, investors would avail indirect ownership of properties, as well as would further benefit from its diversification.

Notably, Real Estate Investment Trust as an investment option tends to resemble mutual funds, the only difference being that Real Estate Investment Trust holds properties instead of bonds or stock options. Furthermore, Real Estate Investment Trust investors are entitled to avail the assistance of financial advisors to make more informed decisions in terms of investing in a suitable Real Estate Investment Trust option.

Tips to Assess Reit India

Investors can assess the merit of a particular Real Estate Investment Trust effectively if they factor in the following tips.

• Before investing in any particular Real Estate Investment Trust, investors should look for corporations that have a positive record when it comes to offering high dividend yields. Correspondingly, they analyze the company’s role in facilitating capital appreciation in the long run.
• Investors can expand their investment portfolio by purchasing shares through stock exchanges without the need to stay invested for the long term.
• Investors should park funds into Real Estate Investment trusts that hold diverse properties and tenants.
• They should opt for ETFs and mutual fund options that invest in Real Estate Investment Trusts. Since these funds come with professional assistance; investors would be able to accomplish them more proficiently.
• Opting for companies that have been active in the field for several years as well as have an experienced core team would prove more beneficial. Finally, entities should make a point to find out how their investments would be compensated. For instance, they should scrutinize the management team of Real Estate Investment trust as well as their performance record with the help of metrics like fund from operations or financial management rate. Similarly, it would prove beneficial to factor in a REIT’s growth in EPS and current dividend income before investing to maximize returns.

Long-term investments in Reit India

Real Estate Investment trusts work best as long-term investments. In addition to interest rate fluctuations, numerous factors affect Real Estate Investment trust prices over short periods of time. I generally don’t suggest putting any money into Real Estate Investment trusts that you’re going to need within the next five years. Longer time horizons are even better.

Property-specific risks

While Real Estate Investment trusts can add diversification to your portfolio, it’s worth pointing out that most individual Real Estate Investment trusts are not very diversified. The emphasis on a specific property type. And each type of commercial property has its own set of risks as well as drawbacks. For example, hotel Real Estate Investment trusts are very sensitive to recessions and other economic weaknesses. If you choose to invest in Real Estate Investment trusts, it's smart to choose a few with different levels of economic sensitivity. You could also invest in a Real Estate Investment Trusts ETF as well as a mutual fund that spreads your exposure among different property types.

The bottom line

For most investors, the benefits of incorporating Real Estate Investment trusts into a well-diversified investment portfolio outweigh the risks. Nonetheless, it’s imperative to know what you’re getting into before adding any type of investment to your portfolio. The above pros and cons can help guide your decisions about how much of your assets you want to invest in Real Estate Investment Trusts. Use them to set realistic expectations about your investments as well as make the right decision for your portfolio.

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