Real Estate Investment Trusts (REITs) In India is new in the sense that up till now we had just 2 issues of these to invest. But globally REITs are major money catchers and soon India will have more options. So in today’s article let us check how Real Estate Investment Trusts (REITs) are governed, run & how they make money for investors.
Real Estate Investment Trusts (REITs) In India has seen a slow start. The first issue of Embassy Office Parks REIT came in March 2019 and then a few days ago in July 2020 we had the second issue by the name Mindspace Business Parks REIT Ltd.
Let us see if these are good investments or not.
What are Real Estate Investment Trusts (REITs)?
It is a mutual fund that invests in real estate. It has a structure that is similar to how mutual fund houses operate. So it is a Trust with trustees taking responsibilities of identifying & investing in options related to Real Estate projects on behalf of beneficiaries (investors or unit holders).
REIT collects money from investors and invests in real estate properties both commercial and residential to generate fixed income through rents. Simply put, with REITs, investor can invest in real estate without owning it physically.
REIT can earn rent on a monthly, quarterly, half-yearly, or yearly basis. In India, REITs pay dividends on a half-yearly basis.
REIT can be of 3 types.
Where & How can REIT invest?
REIT can invest in real estate only. This can be done through a special investment vehicle (SPV – means a 3rd party firm acting as main) or directly in the project.
Eighty percent of the money has to be invested in completed rent-generating properties. Rest can be invested in cash, money market bonds, govt or corporate bonds, realty stocks, and property under construction.
For Investors, the minimum investment required is INR Two Lakhs. And when it is listed in the exchange the trading lot will be worth one lakh each.
While there is a NAV but there is no “growth” option!
Twice a year (at least), the REIT will have to distribute 90% of the income as a dividend. There will also be some growth in the value of the units.
How are Gains from REIT Taxed?
The dividends were tax-free till 31 March 2020.
From 1 April 2020, these are taxable and incident to pay tax on dividend also lies with investors. So now REIT will have a Dividend Withholding (TDS) at the rate of 10%.
Moreover, capital gains from units less than 3 years old will be taxed at 15%+ cess and above that is taxed at 10% +cess. Units bought & sold after 3 plus years will be taxed at 10%.
Risks Involved in Real Estate Investment Trusts (REITs) Investments
The REIT combines the concentration risk of a sectoral mutual fund and the credit risks of a debt mutual fund. Legal issues in ownership and construction or occupation delays can hit income.
Recessions can hit developing commercial real estate pretty bad. There can be defaults or lack of tenants.
There is no benchmark to compare with, aside from say, a fixed deposit.
Rental yields are low and the situation will be bad post COVID. Hence one cannot expect double-digit returns.
Although Rental Contracts talks about annual increase in rents, but these are negotiated. So a decline is possible.
Real Estate income yield in India is about 7.5-8.5%. If it goes down by 1-2%, it will be a fight to stay above inflation.
Can MFs Schemes invest in Real Estate Investment Trusts (REITs)?
Yes. The investment limit is capped at 10% of the corpus of the scheme. If you invest directly in a REIT, the risk would be much higher. MFs can invest or diversify taking the REIT route.
Should you invest in Real Estate Investment Trusts (REITs)?
If are OK with taxation and happy with 5-7% of returns you may invest in REIT. Also, if you are looking for regular dividend earnings, REIT can be one more option with favorable taxation.
REIT units are listed in Stock Exchanges (BSE & NSE). But since these are new products, one may not get enough liquidity to sell the units.
To conclude, Real Estate Investment Trusts (REITs), looks a good product and good diversification for DEBT oriented investors. In future, we may get more such issues and then we can have the performance to compare.
