Everything You Need To Know About REITs
Having developed into a reliable market force, REITs have spread across various countries in the past decade with a total market capitalization of over USD 900 billion. Although still struggling to land its feet in India, it’s been quite a success in other Asian markets such as Singapore and Hong Kong. However should it manage to take off, it could prove to be a new dawn for the struggling real estate sector in the country.
What are they?
In simple terms, REITs or Real Estate Investment Trusts are investment vehicles that own, operate and manage a portfolio of income-generating properties for individual investors to invest in and earn income through partial/equity level ownership, without actually having to buy those assets.
These are usually real estate properties (luxurious and residential property, offices, shopping centers, hotels etc.) that generate rental income. SEBI (Securities and Exchange Board of India) requires Indian REITs to be listed on exchanges and to make an initial public offer to raise money.
How do they work?
REITs work very much like mutual funds; they pool funds from a number of investors and invest them in rent-generating properties, thus providing their investors with regular income as well as benefits of long-term capital appreciation.
Likewise, they also have to follow a three-tier structure including – the sponsor responsible for setting up the REIT, the fund management company responsible for selecting and operating the properties, and the trustee for ensuring that the money is managed in the interest of shareholders.
How are they beneficial to you and the market?
For quite some time the Indian real estate sector has been facing a liquidity crunch due to loss of demand and unsold inventory. REITs can help these cash-crunched builders in monetising their existing properties. On the other hand, it will enable investors to enter the property market with a minimum sum of Rs.2 lakh, which is far lesser than actually having to buy a property. And considering that Indian investors don’t have too many regular income options, REITs could turn out to be a better option as they provide investors with a highly liquid stake in real assets typically offering high yields.
There’s hardly any doubt that REITs will provide access to large-scale commercial properties and high-quality retail assets, which may be otherwise out of reach for individual investors. But like all things only after tasting it will we get to know the real value.