We all know that real estate is the easiest way to wealth creation in the long term. But, dealing with capital requirements, property maintenance, and the know-how of the market, in addition to a high amount of capital, may pose a problem for a new investor, as he may not have adequate money to buy real estate such as an apartment building, shopping mall, or empty land.

An attractive option could be the investment in a Real Estate Investment Trust or REIT. Through investment in a REIT, an investor can own a stake in real estate investment without buying and managing a property. That means you can profit from real estate while investing less capital.

As REITS are getting immense stature in India as well as in the world and therefore becoming a more appealing destination for Indian investors, due to access, convenience and transparency offered to them.

What is a REIT?

A Real Estate Investment Trust or REIT is an organization that owns or finances income-generating properties, or both.

Properties that can be owned by a REIT:

• Shopping malls
• Office buildings
• Apartment buildings
• Restaurants
• Retail shopping centres
• Hotels
• Industrial properties
• Hospitals

The REITs earn income from the rent that tenants pay on their respective properties, and the dividend is then distributed to the investors as income from the REITs. A REIT can be compared to a mutual fund but while mutual funds deal with stocks and bonds, REITs deal with real estate.

How does the REITs work?

The funds raised from the investors are invested in a property, by buying some high-value properties. A REIT share can be purchased from a stock exchange in the same way as an investor buys shares in an organization. REITs generate income by receiving

• Rent
• Leases
• Capital appreciation (after selling the property at a higher price)
• Interest earned on real estate that it finances

Under regulations, REITs must distribute a percentage of their income tax earnings in the form of dividends to its shareholders.

Types of REITs

• Equity REITs: these are REITs which predominantly invest in owning and managing properties, and have the potential for both capital gains and income through rentals. These are the most suitable for new investors.
• Mortgage REITs: this type of REITs provides loans and mortgage-backed securities, therefore earning income from the interest.
• Hybrid REITs: they invest in both properties and mortgages; therefore they can earn from rentals as well as from interest generated from loans and securities.

Benefits of Investing in REITs

• Relatively low capital: Investing in a physical property will demand a high amount of capital while it’s not the case when you invest in a REIT.
• Steady income stream: they share most of their rental earnings as regular dividends thus they make them a favourite among retirees that desire stable and consistent income.
• Liquidity: REITs share trade on a stock exchange and thus one can easily sell them when one wishes, just like a share of an organization, but not in the case of physical property.
• Diversified portfolio: REITs commonly own different properties; therefore they make an investment secure by offering diversifications.
• Professionally managed: Professional management teams at REITs takes care of all the property-related activities such as up keeping, tenants, lease, financial management, and therefore the investor doesn’t have to bother about all this.

Risks of Investing in REITs

• Interest rate sensitivity: As and when the central banks hike the interest rates, the value of REITs is expected to drop due to increase in borrowing cost of REITs and higher return opportunities on bonds and debts which gain relative attraction over REITs.
• Market Volatility: A downturn in economic growth can also affect the rentals in the case of office, commercial and hotel REITs, and eventually their property values too.
• Sector-specific risk: If a REIT mainly consists of only a particular type of property in its portfolio like shopping centres or offices, then in case the said sector goes down, it will affect the value of the REIT.

How can investors earn income from REITs?

• Dividends: the REITs distribute major parts of its profits in the form of dividends to the investors.
• Capital Appreciation: if the value of property rises, the value of REITs share increases, and so do the gains that an investor earns on them.

REITs in India

REITs in India are regulated by the Securities and Exchange Board of India (SEBI) to create investor confidence in such investment options. Such Indian REITs invest in IT parks, commercial complexes, malls, office buildings, etc, making them available to investors without significant amounts of money needed, especially for investors having less net worth.

Who should invest in REITs?

• New investors who may find them a safe and good way to explore the world of real estate investment. People who are looking for a steady stream of passive income through dividend distributions.
• Investors who wish to diversify their investments by including real estate.
• Long term investors who usually find them more suitable than those who opt for short term real estate investments.

Before Investing, investors need to look into the quality of properties being held by the REITs, rent collected by these REITs, dividend paid over a few years, the economic condition, the managers running the REIT etc.

Tips for beginners while investing in REITs

• Do thorough research.
• Check dividend payout history.
• Invest in various REITs or sectors.
• Keep an eye on economic indicators.
• Think long term.

Conclusion

REITs are an easy and quick means to be a part of the real estate world without buying and managing the property yourselves. They are a good entry point to the property market through dividend earnings and capital appreciation as they offer a wide scope to investment, and additionally, they serve as a proper medium for investing for beginners who wish to diversify their investments, with passive income generation over the long run, owing to their liquidity and expert management.