What is REIT? And How Does it Work?

A real estate investment trust, or REIT, is a company that possesses, operates, or finances income-generating real estate. Similar to mutual funds, REITs provide for everyday Investors—not only Wall Street, banks, and hedge funds—to benefit from expensive real estate, offer the opportunity to access dividend-based income and total returns and help communities thrive.

REITs allow investors to expand portfolios of real estate assets the same way they invest in other industries – through the purchase of a mutual fund or exchange-traded fund (ETF), or individual company stock – without actually having to go out and buy, manage or finance the property, REITs allows its stockholders to earn a share of the income produced.

In other words, REITs pool funds from numerous investors to buy income-generating real estate properties. REITs manage these assets to earn capital appreciation and rental income.

REITs invest in properties like commercial spaces and residential spaces and rent them to generate rental income. However, Indian REITs focus on office properties as there is a rapidly growing demand for commercial spaces. By investing in REITs, investors can make a steady source of income as a dividend. This dividend is paid from the rental income the company earns.

REIT investment is not extravagant, allowing both small and big investors to partake in the real estate market of India. When REITs were introduced in India, the minimum investment cost was INR 50,000, with a lot size of 200 units. However, to increase liquidity in the REIT space. SEBI reduced the investment price cost to INR 10,000-INR 15,000 with a lot size of one unit.

Types of REITs

• Equity REITs

These REITs primarily focus on investing in Commercial offices, residential complexes, and industrial estates. Equity REITs acquire, build, manage, renovate, and sell income-generating real estate properties. REITs generate income by selling properties and collecting rent. The earnings made after this buying and selling process are later distributed among investors as dividends.

• Mortgage REITs

REITs Mortgage, or mREITS, provides loans to real estate investors, and some may even buy out existing mortgages. Most mREITs invest in mortgages utilizing mortgage-backed securities (MBS) and earn income from the interests received through mortgage loans. Rather than owning physical property, Mortgage REIT owns interest bearing-assets. Mortgage REITs provide the required liquidity to the real estate market, but REITs include high-risk components.

• Retail REITs

Retail REITs own and manage retail properties in central business districts and upmarket areas, such as shopping complexes, grocery stores, supermarkets, etc. How are Retail REITs different from other REITs? Retail REITs do not operate these retail outlets, nor do they sell them. They make money by leasing these spaces to the tenants; in return for these spaces, tenants pay monthly, quarterly, or annual rent to the REIT Company. Returns in Retail REITs are highly dependent on the retail sector’s performance.

• Residential REITs

Residential REITs specialise in buying and operating apartment buildings, student housing, manufactured houses, and single-family houses. Investing in the Residential Real Estate market can diversify your portfolio, recovering all the losses you may have made in the stock market. In terms of long-term views, these REITs reflect positive growth whenever the residential property market in India rises.

• Healthcare REITs

Similar to the Retail REITs, Healthcare REITs own, acquire, operate, manage and develop healthcare-related spaces. Healthcare REITs’REITs’ property comprises hospitals, clinics, senior living facilities, medical offices, laboratories, research properties, outpatient facilities, and skilled nursing facilities. These REITs generate net operating revenue from the fees paid by the patients for the treatment.

• Office REITs

Office REITs own, acquire, manage, operate, and develop commercial spaces for investors who are seeking to start a company or looking for commercial property for their start-ups. OFFICE REITs primarily indulge in the business of constructing, owning, and managing properties and generating net income through leasing them or selling those properties. Office REITs assure pay-out to the investors or shareholders as dividends as long as the company generates income from the operations.

As For Now, There Are Three REITs Options Available in India

• Brookfield India Real Estate Trust
• Embassy Office Parks REIT
• Mindspace Business Parks REIT

While India has constraints on overseas investment in real estate, and the vision of REIT is in a developing phase, the Indian real estate market has the potential to align Indian REITs in line with their foreign counterparts. Robust regulatory policies issued by SEBI can also bring a revolutionary change in much-needed investor confidence for the newly-introduced REITs in the Indian financial markets.

REITs could be game changers for investors, and investing in REITs is a good option to diversify your portfolio. For those who cannot directly invest in real estate due to not having enough cash, REITs allow them. Real Estate investment does have the potential to fill one pocket with cash. However, the proper amount of research and diligence is required for the investment as REITs, and the Real Estate market is volatile and involves risk.