REITs is a mode of investment in real estate which is modelled after Mutual Funds. It allows both small and large investors to acquire ownership in real estate ventures, in some cases operate commercial properties such as complex, shopping malls, hotels, warehouses etc.
Reit invests in real estate through property or mortgages and is traded on major exchanges like stock.
REITs provide investors with highly liquid stake in real estate. They receive special tax consideration and are offered high dividend yield.
Types of Reits:
- Equity Reits:
It allows investors to own the property and generate revenue by letting out for rent. They are responsible for the equity or value of their real estate assets. Their revenue comes from leasing space to tenants. These rents are distributed to shareholders as dividends. Equity Reits may sell the property holdings, which affects the capital appreciation, reflected in dividends.
It allows investors to earn property mortgages, purchase mortgage properties and loan money. Profits from these Reits are received from the interest earned on the mortgage loan.
- Hybrid Reits:
Both equity and mortgage Reits when combined are called hybrid Reits. Hybrid Reits invest both in properties and mortgages.
Other Types: (Popular In US Market)
- Retail Reit:
These Reits invest in shopping malls and freestanding retail stores. It is considered as the single biggest investment type in America. They make money from the rent they charge from tenants. Preferably, rents from these units should have good profits, low debt, strong balance sheets.
- Residential Reit:
These Reits own and operate multi-family rental apartment building and manufactured housing. They focus on large urban centres.
- HealthCare Reit:
These Reits invest in hospitals, retirement homes and other healthcare centres. They are beneficial as long as the healthcare system is in place and healthcare funding is strong.
- Office Reit:
These invest in office buildings and receive rental income from tenants. An investor should look into metrics like economy, unemployement, vacancy rates, before investing in office Reits.
- All Reits must have at least 100 shareholders, no 5 of whom can hold more than 50% of shares between them.
- At least 75% of a Reit’s assets must be invested in real estate, cash, U.S treasury, 75% of gross income must be derived from real estate.
- Reits must pay out 90% of the profits as dividends to the investors to qualify special IRS tax consideration. This attracts investors of all income levels.
- Many Reits have Dividend Reinvestment Plans that allows returns to compound over time.
- Trustees with REIT have defined duties which involve ensuring compliance to all applicable laws that protect the rights of the investors.
Process of REIT:
REIT is a process to generate funds from a lot of investors to directly invest in profitable real estate. All trusts with REIT will be listed with the stock exchanges, REIT assets will be held with independent trustees for investors.
REIT’S objective is to provide the investors with dividends that are generated from the capital gains accruing from the sale of commercial assets. It is also supposed to provide diversified and safe investment opportunities with reduced risks and ensure maximum return on investments.
- Income dividends:
90% of distributable cash at least twice in a year
REIT will showcase the full valuation on a yearly basis and will also update it on half-yearly basis.
According to the guidelines, REIT should invest in a minimum of two projects with 60% asset value in a single project
- Lower risk:
At least 80% of the assets will have to be invested into revenue generating and completed projects. Remaining 20% can include under construction projects, equity shares of the listed properties, mortgage-based securities.
Selecting a REIT:
While assessing a Reit, look for the following things:
- High Rate Of Dividends
- Long term Capital Appreciation
- Funds From Operations
- Dividend Per Share/FFO (Higher the better)
- Also check out the management and quality of the company.
REITs In India Till Date:
The REIT platform has already been approved by the Securities and Exchange Board of India (SEBI).
The real estate sector in India has not been a profitable venture in the past few years. The introduction of REITs will open up a platform that will allow all kinds of investors (large and small) to make safe and rewarding investments into the Indian real estate market.
Investing in REIT can be compared to investing in Gold Bonds. Indians are partial to buying physical Gold rather than in Gold Bonds. It means having one’s own investment in property will always provide Indians greater satisfaction than mere paper investments.
At the end of the day, REITs are investment instruments and not a means to acquire actual properties.
In 2016 Budget, Modi Government removed the major obstacle in the path of the successful listing of Reits, ie Dividend Distribution Tax (DDT). DDT was exempted on Special Purpose Vehicles(SPV’s). Rules for REITS were relaxed. SPVs are now allowed have holdings in other SPV structures and the limit on number of sponsors has also been removed.
- SEBI has also prescribed the guidelines for Public Issue Of Units Of Reits, Continuous Disclosures and Compliances by Reits in December 2016.
- SEBI has also recognized RICS (Royal Institution of Chartered Surveyors) as valuers for REIT assets.
- Till date, banks were allowed to invest in equity-linked Mutual Funds and Venture Capital Funds. But RBI has now proposed to allow banks to invest in Reits and InVits (Infrastructure Investment Trust).This may give rise to diversification in banking activities which will further lead to increased growth and profits.
- India is going to see its first Reits listing in the year 2017. This will increase demand for office space.The commercial real estate would not only grow manifold but also its transactions will be systematized as this sector is unorganized at present.
- REITs will attract retail investors in India because of their preference for investments in commercial developments , specifically in the highest quality or Grade A properties due to the higher rental yields in this asset class. Also, only 20% of an Indian REIT’s capital can be invested in development, which is the riskiest end of the real estate industry. The remaining 80% of the fund’s assets must be invested in income-producing property.
- Since REIT projects are often office buildings or shopping malls, they have already been developed and have tenants, so their income stream is relatively easy to predict. As the value of these projects increases, REITs will hold them for a long term and not trade in and out of real estate. The rental yield in commercial asset class across the country is usually in the range of 8-11%.
- InVits and Reits as investment vehicles can be used to attract private investments while reducing the burden on formal banking institutions.
Though there is not much buzzing about Reits in India at present, it will soon gain importance in the near future as there are initiatives coming up by concerned regulating authorities.
R. Rupa and V.N.M.Kishore