A Guide To Investing In Indian Reits With Zerodha

Real Estate Investment Trusts (REITs) are a popular way to invest in real estate without the need to directly purchase or manage properties. Designed to democratise real estate investment, REITs allow individuals to invest in large-scale, income-generating properties. In India, investors can apply for REIT IPOs using UPI, net banking, or physical ASBA. Zerodha, a popular trading platform in India, offers the option to apply for REIT IPOs through its Kite app and web platform. With a minimum investment of ₹2 lakh, investors can expect returns between 8% to 14% annually, making it a less volatile option compared to the stock market, FDs, mutual funds, and gold.

How to apply for REIT IPOs using UPI

Real Estate Investment Trusts (REITs) are like mutual funds for real estate investment. Investors pool their money, and a REIT invests in commercial properties. Returns come from rental income and property value appreciation.

In June 2022, SEBI allowed the Unified Payments Interface (UPI) mechanism for REIT IPO applications. Before this, only net banking or physical ASBA were allowed.

• Select the REIT IPO from the ongoing list of IPOs and tap on "Apply".
• Tap on "Apply" again and enter the UPI ID.
• Enter or edit the Quantity and the Price. The quantity should be a multiple of the lot size, and the price entered should be within the issue price range.
• Tap on the undertaking tick box and swipe the "Submit" button.
• Accept the mandate on the UPI app.
• Enter the Qty and Price again.
• Click on the undertaking checkbox and click on "Submit".
• Accept the mandate on the UPI app.

Please note that REIT IPO applications made through UPI are considered Non-Individual Investor (NII) category bids. Once applied, the bids cannot be cancelled or decreased. However, they can be increased up to ₹5 lakhs.

How REITs can be used in an investment portfolio

Real Estate Investment Trusts (REITs) are a great way to diversify an investment portfolio. They are a key consideration when constructing an equity or fixed-income portfolio. Here are some ways in which REITs can be used in an investment portfolio:

Diversification

REITs can provide added diversification to an investment portfolio. They allow investors to invest in commercial real estate without actually buying and managing properties themselves. By pooling their money, investors can gain exposure to a wide range of properties, such as apartment buildings, cell towers, data centres, hotels, medical facilities, offices, retail centres, and warehouses. This diversification can help reduce risk and provide a more stable investment portfolio.

Higher Total Returns

REITs have the potential to generate higher total returns compared to traditional stocks and bonds. From 1972 to 2019, REITs returned an average total annual return of 11.8%, compared to 10.6% for the S&P 500.

Lower Risk

REITs tend to be less volatile than the stock market, making them a good option for investors with a lower risk appetite. They are less susceptible to market fluctuations and can provide a steady income stream through dividends.

Dividend Income

REITs are required to distribute a large portion of their income to shareholders in the form of dividends. This provides a steady income stream for investors and can boost their overall returns.

Long-Term Investment

REITs are typically more suitable for long-term investment horizons. They are more in sync with the movement of the real estate market, which tends to have longer cycles compared to the stock market.

Inflation Hedge

REITs can also serve as a hedge against inflation. By staying invested in REITs for the long term, investors can protect their funds from inflationary effects more effectively than with traditional stock options.

Retirement Planning

Including REITs in a retirement portfolio can be beneficial. They expose the portfolio to a diverse mix of properties and provide a steady income stream through dividends.

Accessibility for Small Investors

REITs make real estate investing more accessible to small investors. They allow investors with limited capital to invest in a portfolio of high-value properties, such as skyscrapers, shopping malls, or apartment complexes.

In summary, REITs can be a valuable addition to an investment portfolio, providing diversification, potential for higher returns, reduced risk, and a steady income stream. They are particularly well-suited for long-term investors seeking exposure to the real estate market and a hedge against inflation.

Top REIT stocks to invest in India

Real Estate Investment Trusts (REITs) are an increasingly popular investment vehicle in India, allowing individuals to invest in large-scale, income-generating properties without the need for direct purchase or management. With the introduction of regulatory frameworks by the Securities and Exchange Board of India (SEBI) in 2014, REITs have become an attractive option for both institutional and retail investors.

Top REIT Stocks in India

• Nexus Select Trust: This REIT operates in the commercial real estate sector, managing a diverse portfolio of retail and office spaces across major Indian cities. It boasts strong financial health, with a net profit margin of 29.86% and a cash flow margin of 60.74%.
• Mindspace Business Parks: Specialising in the development of business parks and office spaces, Mindspace has demonstrated consistent revenue growth, with a 5-year CAGR of 7.93%, outperforming the industry average. It offers an expected return of 9.38%, making it an attractive option for investors seeking returns from commercial real estate.
• Embassy Office Parks: Embassy Office Parks is a prominent player in the commercial real estate sector, focusing on office spaces. Its prudent financial management is reflected in its 5-year average debt-to-equity ratio of 49.15%, lower than the industry average. It currently offers an expected return of 4.77%, indicating modest but steady growth.
• Brookfield India Real Estate Trust: Managing high-quality office assets across major Indian cities, Brookfield has experienced volatile earnings but is expected to make a significant turnaround with projected earnings growth of 1147.08% in the coming year. Despite a relatively low net profit margin of 1.27%, its expected earnings surge presents an opportunity for investors.

Factors to Consider

When considering investment in REITs, it is important to assess various factors, including dividend yield, occupancy rate, tenant stability, management expertise, debt levels, market trends, and the specific sector (residential, commercial, or industrial). Additionally, it is crucial to evaluate company performance, portfolio diversification, market conditions, and your risk tolerance.

Benefits and Risks

REITs offer benefits such as diversification, liquidity, and professional management. They provide a consistent income stream through dividends and allow investors to gain exposure to the real estate market without the burden of property ownership. However, it is important to be aware of the risks associated with REITs, including market volatility, regulatory changes, interest rate sensitivity, and property-specific risks.

How to Invest

To invest in REITs in India, you typically need a DEMAT account with a brokerage firm. You can then research and select the REITs that align with your investment goals, considering factors such as company performance, dividend yield, and market conditions. It is generally advisable to diversify your portfolio across multiple REITs to spread risk and balance your investments across different segments of the real estate sector.

Pros and cons of investing in REITs

Pros of Investing in REITs:

• Liquidity: Most REITs trade on public stock exchanges and are therefore easy to buy and sell, offering a high degree of liquidity.
• Diversification: REITs allow investors to diversify their portfolios by investing in real estate assets, which are less volatile than stocks and other traditional investments.
• Steady Income: REITs provide investors with a stable and steady flow of income, including dividend income and capital gains. REITs are required to distribute at least 90% of their taxable income as dividends.
• Transparency: Being regulated by SEBI, REITs provide transparency to investors through audited financial reports.
• Professional Management: REITs bring professional management into the real estate pool, allowing for better lease rentals and trading prices.
• Low Barrier to Entry: REITs are available to any investor, large or small, making them a great way to gain exposure to the real estate market with a low initial investment.

Cons of Investing in REITs:

• Taxation: Dividends from REITs are taxed as ordinary income, and there are no special tax reliefs provided by the government.
• Market Volatility: REITs are susceptible to market-linked fluctuations, especially due to interest rate movements, which can impact their share prices.
• Low Growth Prospect: Since REITs distribute a large portion of their earnings as dividends, they have limited funds to reinvest in their business, leading to slower growth.
• Fees and Charges: REITs may have high management fees and other additional charges that can impact the overall returns for investors.
• Property-Specific Risks: As REITs specialize in specific property types, investors need to consider the risks associated with those properties, such as reduced demand or negative market trends.

How to choose the best REITs for investing

When choosing the best REITs for investing, there are several factors to consider to ensure alignment with your financial goals. Here are some key points to keep in mind:

• Dividend Yield: REITs are known for their dividends, so look for a consistent and high dividend yield, which indicates a reliable income stream relative to the price.
• Occupancy Rate and Tenant Stability: Opt for REITs with high occupancy rates and stable, creditworthy tenants to ensure greater income stability. Look for long-term lease agreements and a diverse tenant base to reduce risks.
• Management Expertise: The success of a REIT often depends on its management team. Choose REITs with a skilled and experienced management team that can make strategic decisions and ensure sustainable growth and returns.
• Debt Levels: Assess the REIT's debt-to-equity ratio to gauge its financial health. Lower debt levels typically indicate a more stable and less risky investment, especially during economic downturns or periods of rising interest rates.
• Market Trends and Sector: Consider the market trends and growth potential in different sectors such as residential, commercial, or industrial. For instance, data centre and logistics REITs may offer more growth potential in the digital age.
• Taxation: Understand the tax implications of investing in REITs in India. While dividends from REITs are generally exempt from tax, interest income is taxable, and short-term and long-term capital gains are taxed differently.
• Risk Factors: REITs are subject to market fluctuations and carry specific risks depending on their focus, such as Hotel REITs underperforming during economic downturns. Consider your risk tolerance and ensure the REIT aligns with your investment goals.
• Performance and Growth: Evaluate the financial health and historical performance of the REIT, including revenue, profit margins, and growth prospects. Consider REITs with consistent revenue growth and a strong track record of generating steady income.
• Diversification: Look for REITs that invest in diverse properties and tenants across different sectors and regions to mitigate risks associated with specific property types or locations.

Frequently asked questions