Have you come across the term REIT? It stands for Real Estate Investment Trust. With REIT, you can be a part of the real estate business without much effort and bulk money. It will pool your money, just like a mutual fund, to invest in real estate. The recent amendment to the guidelines for REIT by SEBI has made real estate investment more accessible to small and medium enterprises. In this blog, we will take a look at what REITs are, their advantages, how to become one, and more.
What is a Real Estate Investment Trust (REIT)?
Real estate investment trusts are companies that own or finance the income-generating properties of the real estate sector. REIT pools capital from multiple investors to invest in a diversified portfolio of income-generating real estate assets. The assets may include shopping malls, residential apartments, hotels, and industrial properties. The real estate investment trust earns income either by selling the properties or from the rental income.
REIT allows people to invest in high-valued properties they might not be able to afford on their own. Hence, the dividend received from the funds equips investors to grow their savings over time.
In simple terms:
A Real Estate Investment Trust (REIT) is a type of company that owns or finances income-producing real estate. Think of a REIT as a way to invest in properties like shopping malls, apartments, offices, or hotels without having to buy the properties yourself.
- Pooling Money: Many investors pool their money together in a REIT.
- Buying Properties: The REIT uses this money to buy or manage real estate that generates income.
- Earning Income: The properties earn income through rent, leases, or interest from mortgages.
- Distributing Profits: Most of the income generated (at least 90%) is distributed back to the investors as dividends.
Anyone can invest in REITs. Even small investors can team up with others to invest in big projects like office buildings or shopping malls.
How do REITs work?
REITs work similar to mutual funds. They pool money from different people and then use that money to invest in various types of properties like offices, malls, and warehouses that make money. The money they make from these properties, like rent and interest, gets divided up and given back to the people who invested in the REIT.
Learn more about mutual funds here.
When you invest in a REIT, you don’t actually own any property yourself. Instead, you get units, like shares in a mutual fund. These units are traded on the stock market, and how well they do depends on how well the properties the REIT invested in are doing. So, if the value of those properties goes up, you could make more money.
REIT Criteria – How to be a REIT?
To qualify as a real estate investment trust in India, a company needs to fulfill specific criteria. Let us see the conditions in detail:
- The company must be set up as a trust under the Indian Trust Act 1882 and registered with the Securities and Exchange Board of India.
- The trust should be managed by a team of trustees or a board of directors.
- REIT must be listed on a recognized stock exchange in India, and the REIT needs to have assets worth at least ₹500 crore at the time of listing.
- At least 90% of REIT’s income should be distributed to investors.
- 80% of the investment should be spent on income-generating property, and the remaining 20% can be invested in other instruments. Only 10% should be invested in under-construction properties.
- Borrowings should not exceed 49% of the total asset value of the REIT.
- During each taxable year, less than five individuals should not have held 50% of their share.
- Must declare Net Asset Value twice every financial year.
How to Invest in Real Estate Investment Trust in India?
Like any stocks listed and publicly traded, investors can buy and sell REITs from the stock market. It also requires necessary analytics and research like any stock trading. The individual investor can purchase any one of the following securities to invest in a REIT.
- Stocks
- Mutual Fund
- Exchange Traded Funds
Read more about Stock Market here
Types of Real Estate Investment Trust
REITs can be classified into different global categories based on the type of real estate holdings. Let’s explore various kinds of real estate trusts and their features below.
EQUITY REITs
Equity REIT is the most common type of REIT. This type of trust invests in and owns income-generating properties such as commercial or office spaces. The revenue generated, mostly as rentals, is distributed as dividends to the investors.
Mortgage REITs
Mortgage REITs usually lend money to real estate investors, and the income received as interest is distributed to investors or shareholders.
Hybrid REITs
A hybrid REIT is a combination of equity and debt REITs. It invests in real estate properties and debt instruments, helping the investor diversify their portfolio. The income is received from rental payments and interest.
Publicly Traded REITs
Publicly Traded REITs are listed on the National Stock Exchange and registered with the Securities and Exchange Board of India. Investors can buy and sell the shares of such REITs on the stock exchange, which makes them highly liquid. However, with liquidity comes the risk of volatility because of market exposure.
Public Non-traded REITs
Like publicly-traded REITs, Public Non-traded REITs are registered with SEBI. However, they are not listed on any stock exchanges in the country. Hence, you cannot buy and sell them online, and they are, therefore, less liquid. You can buy and sell directly from the REIT company itself. Sometimes, they are available to purchase from secondary markets established by brokers or dealers.
Private REITs
Private REITs are neither registered with SEBI nor listed on the stock exchanges. They are only available for purchase by selected investors, making them less liquid.
REITs in India: History
Real Estate Investment Trust is a relatively new concept in India. SEBI introduced its first guidelines regulating the function and workings of REITS in 2007 and amended them in 2014. The recent amendment approved in March 2024 made changes to manage the emerging challenges in the functioning of REITs in India.
Listed REITs in India
Currently, there are only four REIT funds in India. They are:
- Brookfield India Real Estate Trust
- Embassy Office Parks REIT
- Mindspace Business Parks REIT
- Nexus Select Trust
Structure of REITs in India
In India, REIT has a three-tier structure consisting of a manager, a sponsor, and a trustee. Let us discuss the function of each participant in detail:
Sponsor of a REIT
The sponsor of a real estate investment trust is usually the real estate company that owned the assets before the creation of the REIT. The sponsor sets up a REIT and appoints a trustee. The sponsor, along with his group, should hold at least 25% of the units of the REIT up to three years after the creation of the REIT. After three years, the share of the sponsor can be reduced to 15% of the total units of REIT.
Manager of a REIT
The REIT manager will be a company specializing in facilities management that is responsible for making investment decisions for the REIT, managing assets, and ensuring timely reporting by the REIT.
Trustee of a REIT
The sponsor will choose a company that specializes in providing trusteeship as the trustee of a real estate investment trust. For the benefit of unit holders trustee will hold the assets of the REIT in a trusteeship. The trustee will also look after the activity of the manager and ensure the timely distribution of dividends.
Advantages of REITs
Investing in REITs will bring various benefits to investors. Let’s examine some of the advantages of investing in Real Estate Investment Trusts in emerging markets.
- Investing in REITs provides a steady income as a dividend and, over the long term, benefits from capital appreciation.
- Most of the REITs are listed on the stock market, which helps investors diversify their real estate investments.
- REITs are regulated by SEBI, which ensures transparency in financial transactions, ownership, and taxation. Their function under SEBI’s regulatory oversight also ensures trustworthiness.
- The listing of most REITs on the stock exchange makes the buying and selling of the assets easier.
- REITs provide a steady flow of income even when inflation impacts other asset classes.
Limitations of REITs in India
Though REITs and recent regulations have made REITs more attractive and easier, they are not without their drawbacks. Let us delve into the limitations of real estate investment trusts and their workings in India.
- The pace of real estate project development and the availability of new income-generating real estate projects to include in the REITs may vary with time. A delay in the development pipeline may impact the REIT’s future prospectus.
- REITs return almost 90% of their earnings to their investors. However, they can reinvest only 10%% of their earnings in future ventures. Hence, the growth prospectus is very low.
- The availability of high-quality income-generating commercial real estate assets suitable for inclusion in REIT portfolios may be limited in India, particularly outside major metropolitan areas. This could constrain the growth and diversification of REIT offerings.
New REIT Regulation by SEBI
To address the emerging challenges and to foster development in the Indian real estate market, SEBI amended the (Real Estate Investment Trusts) regulations, which came into force on March 8, 2024. The key provisions of the rules are listed below:
- A person must pool at least 50 crores to issue units to 200 investors to acquire and manage real estate properties.
- REITs will include small and medium REITs, and registration, issue, listing, and many other provisions may not apply to small REITs.
- The investment manager of the REIT will do registration of small and medium REITs on behalf of the trust.
- Changes related to tax treatment, incentives, or exemptions applicable to REITs and their investors are being made to promote investment in the real estate sector.
- The regulation Introduced Measures to improve liquidity in the REIT market, such as facilitating secondary market transactions, reducing lock-in periods, or introducing new trading mechanisms.
- The new SEBI law made Amendments concerning the types of real estate assets that REITs can include in portfolios, valuation methodologies, and asset management practices.
- The new amendment by SEBI made Changes related to tax treatment, incentives, or exemptions applicable to REITs and their investors to promote investment in the real estate sector.
The fractional ownership platforms nowadays often require a minimum investment of Rs 25 lakh from investors. However, SEBI’s guidelines for Small and Medium-sized Real Estate Investment Trusts (SM REITs) have brought down this minimum investment to Rs 10 lakh.
This change is significant because it makes investing in real estate more accessible to a wider range of people and also boosts liquidity in the market.
This reduction in the minimum investment threshold enables more individuals to participate in real estate investment opportunities that were previously out of reach for them. It democratizes access to high-quality real estate assets and offers the potential for attractive returns.
So, the recent amendments by SEBI made real estate investment Trusts more accessible to small and medium investors. Keep an eye on the emerging IPOs of REIT and seize the opportunity.
FAQs About REIT
What is REIT?
A real estate investment trust is a company that owns and operates income-generating real estate properties.
What is the full form of REIT?
Real Estate Investment Trust
Who are the major participants of a REIT?
Managers, sponsors, and trustees are major participants in the management of a real estate investment trust.
How does a REIT make money?
Real estate investment trusts invest in real estate properties like commercial buildings, workspaces, shopping malls, etc. The rental income received from these properties is distributed as dividends to its shareholders. Also, they receive capital appreciation by selling these properties.
What are the REITs in India?
- Brookfield India Real Estate Trust
- Embassy Office Parks REIT
- Mindspace Business Parks REIT
- Nexus Select Trust
