Exploring the Benefits of REITs in India - Benefits and Limitations

If you are looking to invest in real estate but don’t have a sizable investible surplus, real estate investment trusts (REITs) are a viable alternative. REITs allow you to invest in real estate, a highly popular investment choice for Indians, even with a little corpus. These stock market-listed investments expose you to real estate without purchasing properties.

What are REITs and their structure?

Before delving into the benefits of real estate investment trusts, let's understand what exactly REITs are and their structure. A REIT is a company that develops and owns income-producing real estate properties. Unlike listed real estate companies, REITs don't develop properties but pool money from investors and invest it in commercial real estate projects.

REITs are like mutual funds, but unlike them, where the underlying asset is equity, debt or a combination of these, REITs' underlying assets are real estate holdings. REITs structure includes:

• Sponsor

The sponsor is the person forming the REIT. The sponsor sets up the REIT and transfers the property owned. Hence, builders generally act as sponsors.

• Trustee

A trustee is a person, appointed by the sponsor, who holds assets on unitholders' behalf.

• Manager

The manager manages the REITs' assets and undertakes investment decisions.

• Unitholders

They are the trust's beneficiaries and become indirect holders by subscribing to the REIT's units.

• Independent valuer and SPV

The valuer values the REIT's assets at periodic intervals. On the other hand, a SPV is a company in which the REIT holds or proposes to hold an equity stake of at least 50%.

Benefits of Investing in REITs

Some potential REITs benefits you get are as follows:

• Small initial investment

Unlike physical properties, you don’t need a large amount to invest in REITs. The minimum investment amount ranges from ₹10,000 to ₹15,000 . The small initial investment ensures participation from a large section of investors willing to invest in real estate.

• Diversification

Diversification is a fundamental investing principle. Investing in REITs allows you to diversify without the hassle of owning or managing a commercial property. Diversification helps mitigate risks and provide stability to your portfolio.

• Professional management

Properties under REITs are managed professionally. This ensures smooth operations, as you don't have to dedicate time and effort to managing properties. Also, SEBI regulates REITs, and hence, there are fewer chances of fraud.

• Regular income generation

If you are looking for regular income from real estate investments, REITs can be a viable option. REITs need to distribute 90% of their cash flow to investors , ensuring a steady income.

Limitation of REITs

While there are many benefits of real estate investment trusts, there are certain limitations too. Some limitations include:

• Limited options

The concept of REITs is relatively new in India. Hence, the options are quite limited. There are only 3 office REITs in India.

• Low liquidity

Though REITs are listed and traded in stock markets, the number of participants is quite low compared to retail investors, resulting in low liquidity.

Wrapping it up

Investing in REITs is a prudent way to get exposure to real estate without making a huge upfront investment. While REITs allow you to diversify your portfolio and offer professional management, be mindful of the limitations. Consider your financial goals and diversification needs before proceeding.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.