REITS In India: Definition, Benefits, Risks & More
People wishing to participate in the Indian real estate industry have a chance thanks to REITs. Learn everything there is to know about REITs in India, including their advantages, hazards, and different investment forms. Infrastructure development and real estate development work hand in hand in promoting economic growth in underdeveloped countries. Real estate & infrastructure are regularly supported by the Indian government because they draw in foreign investment. This money assists the nation’s development by establishing a capital basis.
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The need for offices and hotels in the corporate environment expands along with the business sector. Because the government does not always have enough money to invest in real estate, the sector needs alternative funding options to meet this need. In this circumstance, REITs (Real Estate Investment Trusts) can be useful. Through the use of REITS, anyone can invest in real estate and receive a cut of the earnings.
In the past, Indians bought homes directly or through real estate agents in the belief that their value would rise over time. This type of investment, however, was dangerous because it only produced returns when the market performed well. Additionally, developers were forced to take out high-interest loans, which led to minimal revenues. Foreign investors may now more easily invest in Indian real estate when SEBI (the Securities & Exchange Board of India) issued regulations allowing for REIT investments in 2007. This also increased access to capital for regional developers.
Indian REITs’ evolution
In the 1960s, REITs were developed in the USA as a mutual fund-like investment opportunity to support real estate development by current investments from real estate-minded investors. The real estate industry was booming at the time, providing the investors with tremendous prospects to profit from their investments. As a result, more real estate development projects were starting, which was financially advantageous for investors and developers.
In India, REITs were first introduced by SEBI in 2007. Due to these media’s rising popularity, the board implemented measures to assure their smooth operation. Currently, REITs registered on Indian stock markets are tightly regulated and monitored by SEBI.
What are Indian REITs?
Companies known as REITs hold and manage real estate for financial gain. These businesses also hold control over mortgages and portfolios of priceless real estate. For instance, they might rent out houses, collect rent from tenants, & then pay dividends to shareholders from the rental money.
People have the opportunity to buy pricey real estate and profit from it by investing in REITs. Investors, on the other hand, benefit from both the appreciation of their investment’s value and the income from dividends. REITs are the owners of a variety of assets, including infrastructure, data centres, healthcare facilities, and apartment buildings. These businesses accept investments from both big and small investors. Small investors can pool their funds and make investments in significant commercial real estate developments.
Investments In Different REITs In India
Investments in REITs come in a variety of forms in India. Every type has a different emphasis on real estate investing. The following are the most prevalent types of REITs in India:
Equities REITs
These REITs mostly invest in real estate such apartment buildings, office buildings, hotels, and industrial estates. To make money, they purchase, build, maintain, and sell real estate properties. Real estate sales and rentals provide for the majority of the company’s profits. The earned profits are subsequently paid out as dividends to investors.
Loan REITs:
These REITs extend credit to purchasers of real estate. Some are referred to as mREITs and some may also buy existing mortgages. These REITs make money by charging interest on the issued mortgages. They function exactly like a debt mutual fund, but REITs are more risky.
REITs for retail:
These REITs make investments in the retail industry, including malls, superstores, grocers, and supermarkets. They concentrate on renting the spaces to retail tenants rather than running these establishments. The performance of the retail industry affects the returns of this kind of REIT.
REITs for homes:
Apartment complexes, gated communities and other residential developments are all purchased and managed by these REITs. When the demand for residential properties in India increases, residential REITs see good growth.
Medical REITs:
These REITs make investments in the real estate necessary to operate hospitals, clinics, medical facilities, & other healthcare facilities. The need for healthcare services has grown in recent years, and healthcare REITs are now providing better investment options.
Office REITs:
These REITs make investments in commercial real estate and generate income through rent.
What Qualifies a Company as a REIT?
To be eligible to become a REIT, the corporation must fulfil a number of requirements, including:
- Either a corporation or a business trust should be used
- Expand the number of fully transferable shares.
- It should be governed by a board of trustees or directors.
- ought to have 100 shareholders minimum
- should distribute dividends to shareholders equal to at least 90% of its taxable income.
- Each year, no fewer than five people should control more than 50% of the company’s shares.
- Rent or mortgage interest must account for at least 75% of gross income.
- Stock in taxable REIT subsidiaries should account for 20% of the company’s assets.
- Real estate must make up at least 75% of investment assets.
- The REIT’s total revenue should be invested to at least a minimum of 95%.
Advantages of REIT investment in India
There are various advantages to investing in REITs in India, including:
- Investing in REIT shares is comparatively less expensive than other forms of investment or direct property acquisition. Investors don’t need to put much money up front to purchase a modest number of units.
- REITs are perfect for small investors because they do not require working directly with builders. They also carry less risk of liquidity than a direct property investment.
- Transparency: Since REITs are traded on stock markets, potential investors can research all the information online before making a decision.
- Reliable income is provided by REITs in the form of dividends. Due to the earning being derived from rental income, the dividend payment is typically guaranteed.
- Low danger of fraud: Because REITs are subject to SEBI regulation, fraud is unlikely.
Disadvantages of Investing in Indian REITs
There are a number of disadvantages to investing in REITs in India, including:
- Growth potential is constrained because of REITs’ high investor dividends.
- Higher tax: Compared to other investments, REIT dividends are subject to a higher tax rate.
- High expenses and risk: Investing in REITs carries a high price tag and greater risk.
- Real estate investment trusts (REITs) are susceptible to market trends & changes.
- Investors in REITs have minimal influence on management and performance decisions.
- Selling restrictions: There may be a few limitations on selling shares for a predetermined period of time.
How to Invest in REITs in India?
There are numerous options to invest in REITs in India, including:
IPOs – You should only invest in an IPO after doing extensive research and knowing the dangers. Waiting for the following REIT IPO to be launched is the best alternative because the Indian REIT market is still expanding and has few options.
Mutual funds – You can also invest in REITs through mutual funds, although the real estate exposure is constrained and there aren’t many domestic mutual funds that do. Kotak International REIT Fund of Fund is open to everyone who wants to invest in foreign real estate.
Exchanges for stocks – Similar to ETF stock exchanges, REIT units can be purchased there. You must have a Demat Account in order to acquire these units. Depending on their performance and demand, these units’ prices may change. Only Brookfield India Real Estate Trust, Embassy Office Parks REIT, and Mindspace Business Park REIT are available in India.
Indian REITs’ conclusion
For those interested in investing in Indian real estate, REITs are among the greatest choices. It offers them a fantastic chance to invest their money in real estate assets that might generate income. The real estate industry is open to both big and small investors. REITs provide regular income, liquidity, & diversification with the fewest possible downsides and advantages. Make sure you are aware of any potential hazards if you are considering investing in REITs. A wise investment strategy may involve diversifying your holdings and generating consistent income from the real estate market.
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