Investment has always been an approachable concept for people to smoothen their family’s future. It helps one accumulate some amount for rainy days or accomplish those dreams that were planned goals one day. There are multiple investment options available in the market. Each option seems to be better than the previous one for a novice. Hence, proper guidance is essential in such situations to understand the better investment stream as per the requirements and financial status of an individual. It is similar to segregating jobs from the ocean of job opportunities for a fresher as per their field of study and calibre.
Defining Equity REITs
Equity REITs are defined as companies that own and manage properties that generate income, such as shopping complexes, residential apartments, and office buildings. When the expenses of operating such properties are deducted from the final profits, approx 90% of the remaining taxable amount is disseminated to the unit holders in the form of dividends. Equity REITs also generate income by selling various properties.
The term Equity REITs can also be defined as a company allowing their investors to earn a share of income through commercial real estate ownership without buying or managing the properties themselves. The form of investment is one of the consistent income streams for investors, attracting more investment each day.
Mentioned below are the four listed REITs in India:
What are the Profits of Investing in REITs?
Let us have a glimpse of some of the profitable aspects of investing in Equity REITs:
Income in the Form of Dividends – After deducting the property handling charges, the remaining amount is distributed among the shareholders in the form of dividends. Hence, investors seeking a stable and long-term are advised to opt for REIT.
Diversified Portfolio – Another advantage of investing in REITs is diversification in the portfolio. It helps to gain the trust of investors and improve the clientele base. Diversification helps to maintain the balance of the portfolio. Hence, investors can observe a balance of profits and losses in the portfolio rather than a superficial strike or an extreme dip in profits.
Transparent Investment Option – The listed equity REITs help investors keep track of their investments, making the whole procedure more transparent and reliable. It helps to make the investors stay relaxed and trust the whole process. The listed REIT companies make real estate investing more reliable and liquid. Real-time pricing and valuations help REIT companies provide market transparency for investors for a barrier-free procedure. The financial industry is monitored by analysts, investors, and the financial media. Hence, the options for transparency and liquidity are enhanced further.
High Liquidity- Another advantage of REIT investing is the platform’s high liquidity. Usually, REITs are publicly traded, which eases the process of buying and selling properties. Hence, the higher liquid profile attracts more investors to be a part of the investment option.
Drawbacks of Investing in Equity REITs
We all are well acquainted with the fact that the grass is always greener on the other side; in the same way, a concept is never 100% right or the best always. Let us have a look at some of the possible risk factors of which an investor should be aware before delving deep into the concept:
Escaped Tax Benefits – Every individual’s prime concern is searching for methods to save tax smartly and ethically. However, when investing in REITs, one may face disappointment. The investors receive dividends or capital gains from the REITs. These are taxable payments. Capital gains are taxable at short—or long-term rates. Hence, it might be disappointing for people who wish to escape from the taxation point of this concern.
Mentioned below is the taxation table followed for tax payment on dividend income:
TAXATION RULES
There are different tax laws for dividend income and capital gains when it comes to investors’ income from REITs. Moreover, there are differences in the tax treatment of assets redeemed through an International REITs Fund of Fund. The following summarizes the relevant tax laws:
- Dividend Taxation: Currently, investors must pay full taxes on dividends received from REITs. The dividends paid by REITs to investors is included in their yearly income and is subject to taxation at the tax slab rate in effect for that particular financial year.
- Capital Gains Taxation: Just like with equity investments, capital gains from the sale of REIT units are subject to both short-term and long-term capital gains taxes (STCG and LTCG). STCG, which levies a 15% tax on capital gains on unit sales, is applicable to units held for a year or fewer after the date of unit allocation. The LTCG taxation regulations apply when the holding term is more than a year after the unit allocation date. For profits beyond Rs. 1 lakh (over all equity assets for the relevant financial year), the LTCG tax rate is 10%, with no indexation advantages.
- International REIT Fund of Funds Taxation: Non-equity capital gains taxation regulations apply to capital gains resulting from the sale of units in International REIT Fund of Funds. In this case, the investor’s slab rate for the financial year and the STCG rate coincide if the units are held for a period of three years or less (as determined from the unit allocation date). Units held for more than three years from the date of unit allocation are subject to LTCG taxes, which levies 20% on indexed capital gains.
Market Associated Risks– One of the major risks of investing in REIT companies is the fluctuating market. The risks faced by the real estate market directly reflect on the investors. Hence, people who are not prepared to face the unexpected turns of the market should think twice about the investment option. Having a detailed conversation with your financial advisor is advised in such situations.
Slow Growth Prospect—Another possible disadvantage of investing in REITs is their slow growth. As mentioned earlier, approx. 90% of the taxable income is distributed among the shareholders, which leads to investing only the remaining 10% in future ventures. Hence, people in search of options with higher and faster returns may not find investing in REITs a favourable option.
High Maintenance Fee- High maintenance fees are another disadvantage of REIT investment. The REITs charge the investors fees in two forms- fund and property management fees. These charges may vary depending on the value of the property. Hence, these charges may also act as an obstruction in investing in REIT.
Mentioned below are a few more pros and cons of investing in equity REITs:
Ideal People to Invest in REITs
REITs are companies that deal with high-selling and high-market value properties. Hence, individuals with little or a handful of amounts are not advised to opt for this investment option. Investors with huge capital disposal and those who can manage unexpected financial risks at higher values can find the right investment roots in REITs. Insurance companies, bank trust departments, pension funds, etc., are some of the types of company examples that can think of investing in such options.
Types of REITs
Mentioned below are some of the types of REITs that help to diversify the financial concept for easy understanding:
Equity REITs– These are the ones that own and manage properties and also collect payments from tenants.
Commercial REITs– These are the ones that own and operate different types of commercial properties, such as shopping complexes, data warehouses, and office buildings. They, too, generate income in the form of rent from tenants.
Residential REITs– These are the ones who own and operate a variety of residential housing properties, such as family apartments, student housing, and other similar properties.
Healthcare REITs– these are the ones that own and operate healthcare-related properties such as hospitals, medical centers, etc.
Investing in REITs is an option that should be studied deeply before stepping into the new field. A financial advisor is the right person with whom discussing all the details and understanding each concept in depth is a recommended option. Investment in the real estate sector through RETIs is helpful for people expecting higher profits and transparency.
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Disclaimer – This article is for educational purposes only and by no means intends to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.
