Today people have become aware about the benefits of investment and have started looking for different investment avenues like equity, mutual funds, debt instruments, real estate properties etc. Investment in debt or a real estate property provides the regular passive income which equity investment does not provide. But investing in real estate properties requires huge amount of capital which is so easy for every investor to invest in. But today it is possible to invest in real estate with less than Rs. 400.
How does REIT work?
REIT is a trust that works like a mutual fund. Mutual fund company/ manager collects money from many small and retail investors, and then invests the total collected money in different companies. Similarly, REIT is a company or a trust that collects money from many retail investors and invests the total collected money in different real estate commercial properties to earn regular income. Then the net total collected rental income is distributed among all the investors in proportion to their investment in the fund. It enables the retail investors to earn from real estate property without having to buy it.
As per the SEBI guidelines, REIT managers must invest minimum 80% of the total fund in readymade i.e., ready to use commercial property compulsorily and rest 20% can be invested in under-construction properties or in shares of other companies and they must distribute minimum 90% of the net total rental income among the investors compulsorily. REITs are regulated by SEBI (Securities and Exchange Board of India) and are traded on exchange, so any investor can sell his investment anytime at the exchange similarly as we do sell our investment in equity on exchange.
How mutual fund is different from REIT?
Mutual fund company invests their funds in different assets classes like equity, debt, gold, commodity, real estate etc. while REITs invest their funds only in real estate properties, more specifically in income generating commercial properties.
Benefits of Investing in REIT
1. Low-cost ownership - An individual investor can start investing in REIT at a very low amount, currently with less than Rs. 400.
2. Regular Income - From investment in REIT, an investor can expect a return of around 10-11% CAGR. Besides there is a capital appreciation in the value of property which is reflected through the unit price of REIT fund just like NAV in the case of mutual fund.
3. Diversification - Through REIT an investor from any state or a city can invest in properties of any state or city. For example, an investor living in Delhi can invest in the property of Mumbai, Bengaluru, Kolkata, Jaipur etc.
4. Hassle-Free - When we buy a property a lot of hassle goes on like we need to do paperwork, do registry of the property, find a tenant for the property, pay property tax etc. But when we invest through REIT all these matters are taken care of by the REIT company or a trust and an individual investor does not need to get involved in these matters.
5. Liquidity - One of the biggest disadvantages of buying a property of investment is liquidity. We cannot easily sell our property at our wish price in the market, in fact we do not even know how much time it will take for the property to get sold, it can take up to years to get sold. But REIT has resolved this problem and provided liquidity to the investors. REIT funds are traded over the exchange and an individual investor can easily sell their investment in REIT fund through exchange as and when they wish to.
6. Safety - REIT fund or REIT company are not any kind of cheat fund companies, they are well regulated and registered under the SEBI, therefore the investor money is safe with the REIT companies.
Types of REIT
1. Equity REIT - This is the most popular type of REIT. They invest in the operating and income generating real estate properties. Rent is their main source of income.
2. Mortgage REIT - They are involved with lending money for income generating real estate purchased by mortgage and mortgage-backed securities. Mortgage REITs generate income from the interest accrued on this investment.
3. Hybrid REIT - Allow investors to diversify their investment in both Equity REIT and Mortgage REIT. Therefore, investors can earn rent and interest from this type of REIT.
4. Private REIT - It works as a private placement; investors are institutional investors. Private REITs are not traded on exchange and are not registered with the SEBI.
5. Publicly traded REIT - These REITs are listed on exchange to let the individual investors buy and sell units/ shares of these trusts. Publicly traded REIT are registered on SEBI.
6. Public non-trade REITs - These REITs are registered with SEBI, but they are not listed on the exchange. Also, when compared with other REITs, these REITs are less liquid. They tend to be stable because they are influenced by market fluctuations.
How to Invest in REITs?
An individual Investor can invest in REITs through their brokers. Just like we invest in shares of the companies, similarly we can invest in REIT through three ways:
1. Stock Exchange – Just like we buy shares of any company from exchange through our demat account, we can buy shares of REIT from exchange through our demat account.
2. Mutual Fund – there are some Mutual fund who invest in real estate property or REIT as a part of their portfolio, so we can invest in those mutual funds
3. Initial Public offering – REIT also goes for public offerings and we as a retail investor can apply for the allotment through our demat account same way as we do for IPO of any company.
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