REITs (Real Estate Investment Trust)

Consider real estate investing as a large carnival dedicated to real estate business. If you wanted to have some entertainment and part of the fun, you had to also own a car, manage its maintenance and pray that people would feel like driving. But REITs or Real Estate Investment Trusts provide a way of buying a ticket to all the carnival’s rides with none of the torments of having to run any one of them. Interest in REITs has been growing since the SEBI issued guidelines in 2007, but it was not until 2014 that it picked up pace. They essentially operate as intermediaries between the tangible and grounded environment of real estate and the dynamic, volatile environment of the stock market.

What You Need to Know About a REITs

You can consider REITs as a big piggy bank where a large number of people deposit their gold. Rather than acquiring a building or property on your own, you coordinate with other investors and collectively gather funds, and this war chest buys or obtains property for generating income. It could be office spaces, retail outlets, malls, or even co-working spaces, to name a few examples. Anyone that makes a contribution to the chest is a beneficiary of the same. It is similar to directly owning each of the carnival rides and reaping the benefits without actually operating the business.

How Do REITs Work?

Just like you have the option to go for different carnival rides depending on your preference, you can do the same with regard to REITs. Equity REITs are analogous to the roller coasters—they own and manage the big rides (properties) and they collect the tickets (rents). Mortgage REITs are similar to the vendors—they do not own the games but earn income via lending to those who own those games and in return they get their interest like the vendors get their profit from the snacks they sell. While pure play REITs provide pure form experience, hybrid REITs come with a combination of both. Both offer very flexible means of gaining quick access to real estate making it possible to invest or exit at will.

Classification of REITs in India

1. Equity REITs: This can be thought of as the owners of the REITs out there in the market. They possess the real estate in the sense of buildings such as business premises, shopping centers, or flats and give out tenancies to users. The revenue generated from these properties is in the form of rent and is paid out to the investors as returns on their investment in the form of dividends. Therefore, when you invest in an Equity REIT, you are just buying a piece or a share in producing income properties.

2. Mortgage REITs: They are rather more like the bankers of real estate. Rather than have estates, they advance credit to real estate owners and builders, and make profits through interest on the loans. They are known for dealing with home loans and home loan bonds. Mortgage REITs invest in real estate debt or mortgage-backed securities.

3. Hybrid REITs: Hybrid REITs are a mix of both Equity REITs and Mortgage REITs. They invest in owning properties and the financial services they give, they derive income from both rent and interest income. For many people, it’s the equivalent of getting that longed-for two in a line!

Private vs. Public REITs

In the case of REITs, you can also elect to invest in either of the following categories – private or publicly traded.

• Private REITs: They are like clubs where only members of a certain color or group can unite. They are not listed and very often they are sold only to a limited number of investors. Private REITs are not regulated by SEBI and hence less professionally managed and less liquid. This makes them less liquid and are often traded in a limited market, which is available to institutions or rich individuals.
• Publicly Traded REITs: These are the REITs that can be accessed individually and anyone can invest in them through the stock markets. They are quoted on the national securities exchange such as the national stock exchange in India and are governed by SEBI. For instance, publicly held REITs provide enhanced visibility, investment fluidity, and portfolio tracking in terms of daily stock market performance as compared to private REITs.

ADVANTAGES

• Cheap to Invest: The cost factor is one of the main benefits of investing in REITs. In contrast to regular real estate investments where one needs vast sums of money to purchase the real estate, shareholders in REITs can buy shares with lesser capital. This aspect of the operation of REITs makes the real estate investment market more open since more people can invest in real estate without requiring a lot of capital. Perhaps the most important advantage of REITs to investors is that few units can be bought without a massive initial capital investment; thus, it is suitable for those who desire a diversified portfolio without risking a great deal of their money.
• Transparency: Another advantage of investing in REITs is the element of transparency in reporting their financial statements. Since the REITs are in the stock market, investors enjoy access to all information on the online platform. It also enables potential investors to analyze the financial statements, performance reports and other crucial information before deciding to invest. This information is important to investors because it enables them to make right decisions with the understanding of risks involved and expected returns on the investment. It also minimizes the risk, as publicly held REITs must share information about their operations and financial status frequently.
• Convenient: REITs are also very convenient for people with small investing capital. Unlike direct investments in properties where one is involved with builders or developers to acquire and manage properties, REITs are easy to understand. People can buy stocks in a company through the stock market eliminating the cumbersome tasks of owning and managing actual estates. Furthermore, REITs are less exposed to liquidity risk than directly investing in properties. REIT shares are listed, which means that they can also be purchased or resold faster as compared to direct investments.

Also, Check – REITs vs. Real Estate Mutual Funds

Wrapping Up

Real Estate Investment Trusts (REITs) are among the most attractive and accessible forms of investing in such a potentially highly profitable segment as property. Equity REITs, Mortgage REITs, and Hybrid REITs are many in number to provide investors with various opportunities to meet their total objectives and risk tolerance. The advantages of REITs are manifold: they offer low cost of investments, high level of disclosure, predictable revenues, and lesser incidences of scams, as they operate under SEBI guidelines. Real estate investment vehicles such as REITs thus present compelling, flexible and secure investment options to anyone seeking to diversify their investment portfolio, get exposure to real estates and earn constant income.

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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 scheme related document carefully before investing.