If you are finance professional or an avid follower of the financial markets and stock markets, you are likely to have come across the term REITs. But majority of us continue to be oblivious of this fascinating yet budding financial instrument.
First, let’s enlighten you with the basics. A Real Estate Investment Trust (REIT) is a company that owns and in majority cases, operates income-producing real estate or related assets. The assets owned or managed by REITs can be wide-ranging from apartments, offices, shopping centers, industrial & infrastructure facilities, hospitals, warehouses to mortgages and loans. It essentially borrows from the idea of a mutual fund wherein anyone can buy & sell security units and thus invest in a portfolio of diversified real-estate properties. Therefore, this scheme allows investors to earn a share of income generated from real estate assets without actually making any purchase in real estate property.
Beginners guide to REITs on our online trading website
What makes REITs attractive to investors?
REITs offer a plethora of benefits to all types of investors. Due to the low correlation of real estate sector with stocks and bonds in stock markets, it is considered a valuable addition to an investment portfolio. However, any investment in the sector is fraught with challenges of a large lot size, high transaction costs and geographical issues. So, REITs provide an investor the benefits of a real estate investment minus all the hassles associated with it. A major benefit of REITs comes in the form of assured and consistent income stream because REITs are required to distribute at least 90 percent of their taxable income annually to investors in the form of dividends.
For institutional investors like pension funds and insurance companies, REITs are a much sought after investment option as a consistent income stream helps them maintain a regular cash outflow to their investors. In a nutshell, REITs are an attractive investment vehicle as they provide multi-fold benefits of yield and capital appreciation along with diversification benefits.
From the perspective of developers, REITs are a great source of funds, help lower the cost of capital, smoothen real-estate volatility cycles and improve property market transparency.
We can classify REIT instruments across a number of lines. Primarily, there are two types of REITs – Equity REITs and Mortgage REITs, classified on the basis of type of assets owned by the issuer. Equity REITs are companies that invest in commercial properties whereas Mortgage REITs invest in real estate mortgages or mortgage-backed securities. Equity and Mortgage REITs may or may not choose to get listed on stock exchanges. Depending on whether they are traded on exchanges, there are three types of REITs – Publicly traded REITs, Private REITs and Non-listed REITs. The publicly traded REITs score brownie points over the others with respect to liquidity and transparency.
REITs – Destination India
When they were first launched in US, the underlying idea was to provide all investors with the opportunity to invest in large and diversified portfolios containing income-generating assets from the real estate sector, just the way people invest in other asset classes. Since then, several other countries have adopted REIT schemes and some nations further paved way for investors to put their money in global real estate securities. Coming now to India, it has taken us several years to join the REIT bandwagon. In August 2014, in a much-awaited move, the Securities and Exchange Board of India (SEBI) approved the creation of real estate investment trusts in India. It is certainly a long drawn process but the government & SEBI are taking small steps through various notifications & budget announcements so as to make a seamless entry into the REIT market. Industry professionals as well as analysts vouch for the enormous potential for growth of REITs in India. The key structure of Indian REITs is in consonance with the REIT models of other Asian economies on the parameters of payout ratio, gearing limits and percentage investment in rent-generating assets. However, the major point of concern is related to taxation of REITs which needs to be suitably addressed by the Government.