REITs: Tapping the real potential minus the risks

Aug 05 2014, 05:29 IST
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SummaryREITs that are managed well can offer dividend yields that are higher than those from other investments. They bring the benefits of listing, a stable income source, diversification, small initial investment and professional management

Imagine if you could own a small part of every piece of property you walked into, be it the restaurant down the street, a friend's flat or your office building. On top of that, what if 90% of the rent those properties paid was sent right back to the individuals owning them? Sounds too good to be true? Well, while you may not own the properties outright, through real estate investment trusts (REITs), you can invest in companies that own these properties, and much more.

REITs have been in the news of late, after Sebi issued guidelines for them within the regulatory framework. Investors, both wholesale and retail, will now have another avenue to invest in real estate through a regulated fund route. The Budget has also introduced tax incentives for REITs.

What they are

Through REITs, individual investors can invest in companies that can own and operate real estate and property across India. ‘Property’ includes commercial property (office buildings, shopping malls etc) and residential property (apartments, single-family homes and mortgages etc).

And that is just the tip of the iceberg. There is likely an REIT out there that owns just about anything you can think of, whether it be a cell-phone tower or a retirement home. But note that REITs don't own the businesses themselves, just the locations in which they operate and, in a way, are like landlords. But regardless of the type, to be designated as an REIT, every year it must send 90% of its taxable income to shareholders as dividends. Companies designated as REITs can deduct the dividend paid from taxable income.

realty stakeholder

Risk-reward

REITs that are managed well can offer dividend yields that are higher than those from other investments. As you know, rental yields on long-term commercial office space and retail space tend to higher than those on residential property. They are also higher than dividend yields from stocks, and often in the same bracket as returns from bank deposits.

An REIT investor can thus look forward to reasonably high annual dividends and some appreciation in the long term from the rise in capital values of the properties owned by the REIT. However, there are risks like non- payment of rent and market price volatility.

Vis-a-vis real estate funds

Investors always have the option of buying houses and commercial property directly. This continues to be the preferred mode of investing in

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