What are Real Estate Investment Trusts?
A Real Estate Investment Trust (REIT) is a specialised company which releases its realty stocks and lets people invest in an income-producing real estate asset. REITs are approved by the Securities and Exchange Board of India (SEBI) and enable investment in real estate by pooling money from various investors across the country.
REIT represents a type of association or a company that generates funds to invest in various profitable real estate assets such as residential units, malls, hotels, warehouses etc. Investing in REIT is profitable for people who wish to generate a regular income from their real estate investment. A REIT will need to be registered under the Initial Public Offering (IPO), whereas REIT units need to get listed with exchanges and consequently traded as securities.
The minimum asset size, as prescribed by SEBI, which can be invested in REIT is Rs 500 crore, whereas the minimum issue size should be less than Rs 250 crore. The primary objective of REIT is to grant the investors the rental income and dividends generated capital gains from a profitable sale of various real estate assets. A REIT is presumed to impart a diversified and safe investment opportunity along with reduced risks under professional management to ensure the maximum return on investments.
Structure of REITs
REITs are set up as a trust under the provisions of the Indian Trusts Act, 1882 and are registered with SEBI. Similar to a mutual fund, it includes three parties - trustee, sponsors and a manager.
- The Trustee typically performs an overseeing role on the specific activities of the REIT. A SEBI registered debenture trustee who is not an associate of the sponsor is always the trustee of a REIT.
- The sponsors in REIT collectively hold at least 25 percent share for a minimum of three years and 15 percent afterwards. The responsibilities of a sponsor are to set up the REIT and appoint the trustee.
- A manager represents a corporate body, a company, or a Limited Liability Partnership (LLP) incorporated in India that manages investments and assets of the REIT and undertakes operational activities of the REIT. The manager also looks into the operational responsibilities of the REIT and prevents any conflict of interest issues. A manager is required to have minimum five years of experience combined with other requirements such as a minimum net worth and a workforce with sufficient relevant experience.
Advantages of REITs
Reasonable entry cost - REITs have lower entry costs as compared to other investment mediums. They transform the investment portfolio of an investor and help in reducing the maintenance costs and property taxes. REITs are also exempted from the Dividend Distribution Tax (DDT), thus benefitting the investors.
Flexibility - Since REITs are considerably flexible, the investors can invest in an extensive range of real estate assets ranging from bungalows to shopping malls. REITs are also less vulnerable to market fluctuations and thus qualify to be a slightly more stable investment option. However, REITs are not free from risks as their investment values might fall if supply exceeds demand or if dividend payouts are incredibly high.
Income dividend REIT facilitates both regular and dividend income as long-term capital gains. It also grants 90 percent of distributable cash at least twice a year.
TransparencyREITs offer a transparent medium as they show the full valuation of funds annually.
DiversificationREITs offer diversification to investors as they can invest in more than two projects at a time. The investor can invest in a minimum of two projects with not more than 60 percent of the value of assets in a particular project.
Lower risk At least 80 percent of the assets will be invested in revenue-generating and completed projects. The remaining 20 percent can be spent on under-construction projects.