Real Estate Investment Trusts (REITs) have emerged as a game-changer in the Indian real estate market, offering an avenue for investors to diversify their portfolios without the need to directly purchase immovable property”. Indian investors have long favored real estate as a safe investment option due to its potential for price appreciation. However, soaring real estate prices have made it challenging for retail buyers to enter the market. REITs provide a solution by allowing small retail investors to invest in commercial real estate through the purchase of shares as low as Rs 100-Rs 400 per unit. With the introduction of REITs in India, retail investors now have access to commercial real estate assets that were previously inaccessible. American President Franklin D Roosevelt once said “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
Understanding REITs:
Similar to mutual funds that invest individual money into securities, such as equity, debt, and money market instruments, REITs invest in real estate assets and are listed on stock exchanges. By investing in a unit of an REIT, investors gain partial ownership of the real estate assets held by the trust, entitling them to a share of the income generated by the REIT. The REITs own and operate real estate properties to generate income through leasing and collecting rent. This rental income is then distributed among the unit holders on a quarterly basis.
Evolution of REITs in India:
REITs originated in the United States in 1960, providing investors with the opportunity to profit from diversified, professionally managed portfolios of US real estate. Over time, countries such as Australia, Malaysia, South Korea, Japan, Singapore, Hong Kong, Thailand, Germany, and the UK also adopted the concept of REITs. In India, the Securities and Exchange Board of India (SEBI) introduced draft REIT regulations in 2007, which were later enacted as the Real Estate Investment Trusts Regulations in 2014. The first REIT, Embassy Office Parks, was listed in April 2019, followed by Mindspace Business Parks REIT in August 2020, Brookfield India Real Estate REIT in early 2021, and Nexus Select Trust REIT in 2023. Other prominent names in the real estate sector are also expected to introduce REITs soon.
Participation of Retail Investors:
Currently, there are approximately 1.2 lakh individual investors across India who have invested in REITs. Initially, the high minimum investment requirement for IPO subscription and in the secondary market posed a challenge for individual investors, with amounts ranging from Rs 1 lakh to Rs 2 lakh. However, SEBI revised the minimum investment to Rs 50,000 in April 2019 and further simplified it to 1:1 ratio or based on the share value in August 2021.
Generating Returns from REITs:
Investors in REITs receive quarterly payouts from the net rental income generated through leasing and renting out commercial real estate properties, after deducting expenses. SEBI mandates that at least 90 percent of the net rental income received by REITs must be paid to investors. Apart from regular income distributions, investors also have the potential for capital appreciation as REITs operate as high-dividend stocks with growth potential. Factors such as leasing vacant spaces, rental escalations, and rental reversions at or above market rents contribute to the growth potential of REITs. Since REITs are listed and traded on stock exchanges, the price of an individual unit fluctuates based on performance and market demand.
Also Read:- Why Individual Investors Are Snubbing Real Estate Over Mutual Fund?