Investing in Real Estate Investment Trusts (REITs) has become increasingly popular in India due to the convenience and accessibility they offer. Real Estate Investment Trusts, commonly known as REITs, are investment vehicles that allow investors to invest in income-generating real estate assets. In India, REITs are regulated by the Securities and Exchange Board of India (SEBI) and have been gaining popularity among retail and institutional investors.
A simple example of a REIT would be a group of friends who decide to pool their money together to buy a rental property. Each friend would contribute a certain amount of money and would receive a percentage of the rental income generated by the property. This is similar to how a REIT operates but on a much larger scale.
This article will provide you with a guide on how to invest in REITs in India, including information on the benefits of Investing in REITs and the tax benefits of investing in REIT funds.
What Are REITs?
Real Estate Investment Trusts (REITs) in India are companies that own and operate income-generating real estate assets. These assets can be in the form of office buildings, shopping malls, residential buildings, hotels, and warehouses. Investors can buy shares in a REIT, which entitles them to a portion of the income generated from the underlying assets.
What makes REITs a Good Investment and an Income Generator In India?
REIT investment returns allow investors to invest in real estate without the hassle of owning physical property as well as generate income by leasing out their properties to tenants and collecting rental income. This rental income is then distributed to investors as dividends. The rental income generated by REITs can increase over time as lease rates increase or as occupancy rates improve. In India, REITs were introduced in 2014 to provide liquidity to the real estate market and to encourage more investments in the sector. They also provide tax benefits to investors. Some of the key factors that make REITs a good investment in India are as follows:
REITs in India have the potential to generate an annual return of around 14% making them an attractive investment option
Unlike a direct investment in real estate, REITs are traded on stock exchanges, making them a more liquid investment option
REITs in India are exempt from taxes on rental income and capital gains, making them a tax-efficient investment option.
Real Estate Investment Trusts (REITs) generate income in India through the following ways:
1. Rental Income
REITs generate income by leasing out their properties to tenants and collecting rental income. This rental income is then distributed to investors as dividends. The rental income generated by REITs can increase over time as lease rates increase or as occupancy rates improve.
2. Capital Appreciation
REITs in India can generate income through capital appreciation by acquiring properties that appreciate in value over time. When these properties are sold, the capital gains generated are distributed to investors as dividends or reinvested into new properties.
3. Interest Income
REITs in India may also generate income from interest earned on their cash reserves or from loans made to tenants or third-party developers. This income is typically distributed to investors as dividends.
4. Management Fees
REITs in India may also earn income through management fees charged to the special purpose vehicle (SPV) that owns the underlying properties. These fees cover the costs of managing the properties, including property management, leasing, and maintenance.
5. Development and Redevelopment
In some cases, REITs in India may undertake development or redevelopment projects to increase the value of their properties. This can generate income through the sale or lease of new or improved properties, as well as through the appreciation of the value of the underlying assets.
5 Reasons to Invest in Real Estate Investment Trusts India
Real Estate Investment Trusts (REITs) have become increasingly popular in India due to their unique benefits and attractive investment potential. Here are five reasons why investors should consider adding REITs to their portfolios:
1. Inflation Hedge
REITs can provide an inflation hedge for investors as they are able to adjust rents and lease rates to reflect inflation. This can help to maintain the purchasing power of the income generated from the investments. For example, if inflation rises, the rent and lease rates of properties owned by the REIT may also increase, leading to higher income for investors.
2. Low Correlation to Other Assets:
REITs may have a low correlation to other asset classes, such as stocks and bonds. This means that when the prices of stocks and bonds are falling, REITs may be performing well, and vice versa. This can provide investors with a way to diversify their portfolios and potentially reduce overall portfolio risk. For example, during the 2008 financial crisis, the S&P 500 index fell by around 38%, while the MSCI US REIT Index fell by only 22%.
3. Tax Benefits
REITs can provide tax benefits to investors. For example, REIT dividends are typically taxed at a lower rate than ordinary income, and investors may also be able to defer capital gains taxes by reinvesting dividends. Additionally, REITs can help investors to defer taxes on the sale of appreciated real estate. By selling appreciated property and investing the proceeds in a REIT, investors can defer the capital gains taxes that would be due upon the sale.
4. Potential for Growth
REIT funds offer the potential for growth as they can acquire and develop new properties. This can lead to increased rental income, capital appreciation, and dividends for investors. For example, a REIT that specializes in developing medical office buildings may acquire new properties in growing medical markets, increasing the value of the portfolio and potentially increasing dividend payouts.
5. Exposure to Specific Real Estate Sectors
REITs can provide exposure to specific real estate sectors, such as healthcare, residential, and industrial properties. This can allow investors to capitalize on specific trends in these sectors. For example, if an investor believes that the healthcare industry will grow in the future, they may invest in a healthcare-focused REIT to gain exposure to that sector.
How Many Real Estate Investment Trusts Are Listed in India?
REIT companies in India are a popular investment option in India due to their steady income and long-term growth potential. As of April 2023, there are currently five REITs listed in India, with the latest addition being Embassy Office Parks REIT in 2019.
When it comes to the best REITs to invest in, it's important to consider factors such as the quality of the assets, the track record of the management team, and the dividend yield. Some of the best REITs in India include Mindspace Business Parks REIT, Brookfield India Real Estate Trust, and Embassy REIT. As with any investment, it's important to do your research and consult with a financial advisor before making any decisions.
How To Invest In Real Estate Investment Trusts India?
Investing in REIT funds in India is a relatively simple and straightforward process. Here's a step-by-step guide on how to invest in REITs in India:
Choose a Broker: The first step is to choose a stockbroker who offers REITs. Most of the major stockbrokers in India offer REIT trading. You need to open a Demat account with your chosen stockbroker to hold your REITs.
Choose the REIT: Once you have completed the above steps, you can choose the REIT you want to invest in. There are currently two REITs listed in India – Embassy Office Parks REIT and Mindspace Business Parks REIT.
Place the Order: After choosing the REIT, you can place an order to buy the units of the REIT on the stock exchange using your stockbroker's trading platform. The minimum investment amount for REITs in India is from Rs.10,000 to Rs.15000.
For more details check out our article How to invest in REITs in India: An Easy Guide.
Conclusion
REIT funds provide an attractive investment option for investors looking to invest in real estate without the hassle of owning physical property. They offer diversification, a regular income stream, professional management, liquidity, and tax benefits. With the Indian real estate market growing rapidly, REITs can provide a way for investors to participate in this growth and generate stable income from income-generating assets. The introduction of REIT companies in India has made investing in real estate more accessible to retail investors, providing them with an opportunity to participate in the growth of the sector.
