What is Real Estate Investment Trust (REIT)?

Published by Sharekhan Education | March 6, 2021

What is Real Estate Investment Trust (REIT)?

A Real Estate Investment Trust (REIT) is an entity that allows investors to pool their money to invest in real estate assets. Some REITs buy properties and rent them to tenants, whereas others develop properties right from scratch. REIT is like a mutual fund for real estate. REITs are a vehicle to invest in income-producing real estate properties managed by professionals.

REITs allow even retail investors to invest in real estate assets that they otherwise wouldn’t be able to. For example, could you go out and buy a commercial office tower or a shopping mall?

One can even gain exposure to billions of rupees worth of commercial property portfolios with just a few thousand rupees. REITs manage the portfolios of high-value real estate properties like data centers, infrastructure, healthcare units, apartments, complexes, etc. They lease properties and collect rent thereon. The rent thus collected is later distributed among shareholders as dividends. Embassy Office Parks and Mindspace Business Parks have listed REIT funds in India.

To qualify as a REIT, a company needs to structure as a business trust. A minimum of 75% of investment assets must be in real estate. A minimum of 75% of gross income should accrue from rents. It is required to pay at least 90% of the taxable income as a dividend.

Benefits of REITs:REITs provide dividend income and allow steady capital appreciation over the long term. REITs trade on public stock exchanges and, hence, are liquid. REITs are subject to regulation by SEBI and are required to file audited financial reports. It provides investors with an opportunity to diversify.

Limitations of REITs: The prospect of capital appreciation is overall low as REITs return 90% of their earnings to the investors as a dividend. They are susceptible to market-linked volatility. REIT’s cash flows are only as reliable as its tenants. On the tax front, there is no additional advantage in investing in REITs.

REITs can be great additions to your portfolio, as they can provide steady income as well as growth. It can be a smart way to add diversification to your investment portfolio. Just be sure to have a good understanding of how these companies work.

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