A Guide To Investing In Indian Reits

Real Estate Investment Trusts (REITs) are an attractive investment option for those looking to gain exposure to the real estate sector without the high capital requirements of direct property investment. In India, REITs were first introduced in 2007 and have gained significant popularity among investors since. By investing in REITs, individuals can gain access to high-value real estate, including office spaces, shopping malls, and residential townships, and earn income through rent collection and capital appreciation. While there are benefits to investing in REITs, such as lower capital intensity and higher liquidity, it is important to note that there are also certain limitations, including market-linked risks and a lack of tax benefits.

REITs are less volatile than other investment avenues

Real Estate Investment Trusts (REITs) are a great way for investors to access high-value real estate and generate income. They are companies that manage portfolios of high-value real estate properties and mortgages. REITs lease properties and collect rent, which is then distributed to shareholders as income and dividends.

Additionally, REITs like Realty Income, Essex Property Trust, and Public Storage have strong financial profiles and durable business models, making them reliable investments with lower volatility. The overall stability of their cash flow is a crucial factor in reducing volatility. These REITs have long-term leases with high-quality tenants in industries that are relatively immune to economic downturns, such as grocery stores and warehouses.

Furthermore, REITs benefit from the nature of the real estate market, which has less price fluctuation compared to other investments. The value of REITs does not drop as quickly as stocks in a falling market, making them a more stable investment option.

REITs also provide an opportunity for diversification, as they include various property types such as data centres, infrastructure, healthcare units, and apartment complexes. This diversification further contributes to the lower volatility of REITs compared to investments that are more susceptible to market fluctuations.

Lastly, REITs are regulated and required to file audited financial reports, providing transparency to investors. This regulatory framework adds a layer of stability and reduces the potential for extreme volatility.

In summary, REITs are less volatile than other investment avenues due to stable dividend income, strong financial profiles, stable cash flow, diversification, and regulatory transparency. These factors make REITs a more stable and reliable investment option for individuals seeking long-term returns.

REITs are tax-exempt

Real Estate Investment Trusts (REITs) are a popular way for investors to own income-generating real estate without having to buy or manage properties. They are companies that own and operate income-producing real estate assets.

REITs are taxed differently from corporations. In India, they have been given a pass-through status, which means that the onward distribution of income by a REIT to its unitholders retains the same character as the underlying income stream received by the REIT. Interest income and rental income from property held directly by the trust, for example, is not taxable in the hands of the REIT.

However, any capital gains on the sale of assets/shares of a Special Purpose Vehicle (SPV) are taxable in the hands of the trust, depending on the period of holding, whereas dividend income is not liable to tax. Any other income earned by a REIT is subject to tax at the maximum marginal rate.

REITs are required to distribute at least 90% of their taxable income to shareholders. In turn, REITs typically don't pay corporate income taxes because their earnings have been passed along to investors as dividend payments.

Dividend payments received by investors from REITs can constitute ordinary income, capital gains, or a return of capital—each of which receives different tax treatment. Generally speaking, the bulk of the dividend is income from the company's real estate business and is treated as ordinary income to the investor. This part of the dividend is taxed according to the investor's marginal tax rate.

The REIT may inform investors that part of the dividend is a capital gain or loss. This occurs when the REIT sells property held for at least one year. The capital gain or loss is also passed along to the investor, with gains taxed at 0%, 15%, or 20%, depending on the investor's income level for the year the gain was received.

In addition, a part of the dividend may be listed as a non-taxable return on capital. This can happen when the REIT's cash distributions exceed earnings, for example, when the company takes large depreciation expenses. There are two things to note about a return of capital:

• This part of the dividend is not taxable for the year it is paid to the unitholder. It's taxed later.
• A return of capital lowers the unit holder's cost basis. When the investor sells their units, this payment is taxed as either a long- or short-term capital gain or loss.

If enough capital is returned to the investor and the cost basis falls to zero, any further non-dividend distributions are taxed as a capital gain.

In India, dividend income earned by investors of REITs is tax-free.

REITs are suitable for small investors

Real Estate Investment Trusts (REITs) are suitable for small investors as they allow them to invest in high-value real estate without requiring large capital outflows. Small investors can pool their resources with other investors and invest in large commercial real estate projects. REITs are companies that own and operate income-producing real estate, such as data centres, healthcare units, and apartment complexes. They lease properties, collect rent, and distribute it as dividends to shareholders.

REITs offer several benefits to small investors:

• Less Capital Intensive: REITs are more affordable for small investors as they can buy shares without needing to purchase properties directly. This reduces the financial burden and makes it easier for them to invest in real estate.
• Transparency: As REIT stocks are listed on stock exchanges, all relevant information is available online, providing transparency to investors.
• Assured Dividends: REITs generate income through rental income, which is distributed to shareholders as dividends. This provides a steady and reliable source of income for small investors.
• Tax Advantages: In some cases, dividends earned by REIT investors may be tax-free or taxed at a lower rate, providing tax advantages to small investors.
• Easy to Buy: Investing in REITs eliminates the complex process of buying properties directly, making it more accessible and convenient for small investors.
• Diversification: REITs allow small investors to diversify their portfolios by investing in real estate without the need to directly manage properties. This helps them spread their risk across different asset classes.
• Professional Management: REITs are managed by experienced professionals who handle property acquisition, management, and operational aspects. This hands-off approach appeals to small investors who may not have the time or expertise to manage real estate investments directly.

REITs are regulated by SEBI

Real Estate Investment Trusts (REITs) are regulated by the Securities and Exchange Board of India (SEBI). This means that REITs are required to file financial reports that have been audited by professionals. This provides investors with transparent information on aspects like taxation, ownership, and zoning.

Publicly traded REITs are a popular option for investors as they offer shares enlisted on the National Securities Exchange (NSE) and are regulated by SEBI. Individual investors can easily sell and purchase these shares through the NSE. The shares are typically enlisted on major stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Public non-traded REITs are another option, which are also registered with SEBI but not traded on the NSE. These tend to be less liquid but more stable as they are not subject to market fluctuations.

REITs are companies that develop and own income-producing real estate properties. They are similar to mutual funds in that they pool investments from domestic and international investors. However, REITs invest in income-generating properties, mostly commercial assets, instead of bonds or stock options.

The introduction of REITs in India has provided an opportunity for common people to invest in quality real estate properties developed by reputable builders. It has also given investors access to premium commercial properties, such as office spaces and shopping malls, which offer higher returns than average residential properties.

Overall, the regulation of REITs by SEBI ensures transparency and provides investors with important financial information, making it a viable investment option in India.

REITs are similar to mutual funds

Real Estate Investment Trusts (REITs) and mutual funds share some similarities. Both are liquid investment options, meaning they can be bought and sold with ease. They are also similar in that they are both actively managed, with portfolios that are regularly bought and sold.

REITs are companies that own and manage income-producing real estate properties. They are a popular way to invest in the commercial real estate industry, especially for those with limited funds. They have a low entry barrier, allowing investors to purchase a single share for less than $100. REITs are also highly liquid, so they can be bought and sold with a click of a button.

Mutual funds are professionally and passively managed. They are made after significant research and are purchased in the form of units, with a pre-set price based on the net asset value of the fund. Mutual funds are good for investors who want better control over their investments, as they allow investors to be selective about the fund and company they want to invest in.

Both REITs and mutual funds allow investors to add real estate to their portfolios without the work of buying or maintaining property. They also eliminate the considerable upfront cost of purchasing real estate.

Frequently asked questions