REITs: New way of Investing in Real Estate
What are REITs?
A real estate investment trust is a company that owns, operates, finances an income-generating real estate. It is very similar to how a mutual fund works. In case, you don’t know what is a mutual fund, don’t worry we got you covered. Click on this link and land to our mutual fund article.
REIT typically pools money from investors and invest these collected funds into real estate projects. Projects can range from offices, hotels, malls, and apartment complexes. REIT is an option for those who don’t have the big-ticket checks to buy a real estate property on an individual capacity.
Broadly, there are three types of REIT-
Equity REITs- This is the most common REITs. Here the REIT companies buy real estate to generate income in the form of rent. This income is then distributed to the unitholders in the form of dividends.
Mortgage REITs- This kind of REIT doesn’t buy real estate projects, rather they lend money to real estate owners either directly through mortgages and loans or indirectly through the acquisition of mortgage-backed securities. It receives interest income from the borrowers and these incomes are then distributed to unitholders in the form of dividends.
Hybrid REITs- It owns the property as well as holds mortgages.
In India, there are only two publicly-traded REITs as of now (Embassy Office Parks REIT and Mindspace Business Parks REIT). However, India has not seen any private REITs that are common in developed markets like the US.
Few Highlights on REIT:
The Embassy REIT has outperformed the Nifty50 over the last 10-11 months. The REIT has also outperformed comparable real estate stocks with the exception of Prestige Estates. The chart above does not take dividends or interest income into account. If we add those distributions made to unitholders over the last 2 quarters, then the returns would be higher.
Future of REIT in India
Besides Embassy Office Parks and Mindspace, there are many other REITs that are expected to be listed on the stock exchange in the near future. So, the majority of the big players in real estate will come up with REITs. However, smaller players will avoid REITs for some time due to compliances and regulatory burdens. Moreover, the real estate market doesn’t look too shiny in the coming time.
REIT, from a developer’s perspective, is to monetize the income-generating commercial real estate. Smaller players can opt for loans by rent discounting to monetize their assets and need not take the REIT option.
The total percentage of REIT to the Real Estate market in India is an insignificant portion. However, the trend in developed markets like the US, Singapore, and Japan are around 96% and around 50% respectively. Therefore, it can be predicted that India will too follow the trend.
REIT is definitely a great asset class to stabilize your portfolio income. It provides steady income and will also allow retail investors to participate in the real estate boom. Owning a property directly, may not be an appealing option for millennials. But REIT might attract these young group of investors due to the liquidity of the REIT and its diversification benefit.
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