New-Age Instruments: Want to invest in property? Try REITs | The Financial Express

New-Age Instruments: Want to invest in property? Try REITs

Diversify your portfolio by investing in Real Estate Investment Trusts and get regular income via dividends

New-Age Instruments: Want to invest in property? Try REITs
As REITs are a relatively new concept in India, investors must check if the real assets are from reputable real estate developers and the fund managers have a proven track record and have been able to generate consistent returns.

At a time when commercial real estate is gaining traction after two years of Covid-related disruptions, investors can look at investing in real estate investment trusts (REITs) for exposure to the real estate market. These trusts own income-generating commercial real estates and individuals can buy units of these trusts.

The three REITs — Embassy Office Parks, Mindspace Business Parks and Brookfield India — have outperformed the BSE Realty Index this year. Experts say the post-tax returns from REITS are twice as much as fixed income products. Moreover, the markets regulator has also reduced the minimum application value of investments in an initial public offer of REIT from Rs 50,000 to Rs 15,000, making it a more viable option for individuals.

How do they work

Investing in REITs works like mutual fund investments as the trusts mobilise money from investors and invest the funds in real estate assets. So, for individuals, it is investing in real estate without owning the asset and an ideal way to diversify the portfolio apart from equities, debt and gold. Experts say REITs are suitable for those who want to put money in a real estate asset primarily for investment purposes and have a holding period of atleast three years. The periodic payouts help investors to meet their cash flow requirements.

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As the trusts own many commercial properties across various locations in the country, the diversification helps in the long run in case of any regulatory changes in a particular area or business disruption in certain sectors which can affect the tenancy. As per regulatory norms, REITs distribute 90% of their cash flow to shareholders and investors which enhances the yield for investors. Experts say, REITs have to distribute 90% of their earnings as dividends to investors.

Like mutual funds, REITs are liquid assets and investors can sell their units in the secondary market unlike a capital-intensive physical real estate which is difficult to liquidate quickly. Moreover, investors do not have to go through any registration process done for physical real estate. Investing in REITs saves the hassles of finding good tenants and signing rental contracts and taking a big-ticket loan to purchase a real estate.

Also read: Guaranteed Return Plans vs FD, RD, PPF: Which is better for you?

What to look at before investing

Experts say before investing, individuals must realise that REITs are market-linked and can be volatile like the equity markets. Moreover, commercial real estates can have weak phases of capital appreciation and there are political and regulatory risks, too. Investors must look at the dividend yields which indicates the performance of the portfolio in the trust. They must also look at the revenue growth of the portfolio and the prospects of rental income of the commercial properties and occupancy percentage in the portfolio of the trust.

Investors must look at sectors of the tenancy and even the geographical location. Investors must avoid trusts where the portfolio is highly concentrated in a particular sector, such as the IT sector, which is turning into a hybrid work model and can affect tenancy in the long run.

As REITs are a relatively new concept in India, investors must check if the real assets are from reputable real estate developers and the fund managers have a proven track record and have been able to generate consistent returns.

So in volatile times, investing in REITs is an ideal diversification tool and can earn higher returns on your investments.

REIT ADVANTAGES

* The minimum application value of investments in an IPO of REIT is Rs 15,000

* REITs are liquid assets and investors can sell their units in the secondary market

* REITs are best for those who want to put money in a real estate asset primarily for investment purposes and have a holding period of at least three years

* REITs distribute 90% of their cash flow to shareholders and investors which enhances the yield for investors

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