Why Invest in Real Estate Investment Trusts?
Price of real estate is soaring especially in the Metro’s making them unaffordable. Thinking of buying a plot of land in Bangalore but the high prices and the hassle of encroachments (Squatters occupying your land when you are not around) is worrying you?
The huge returns obtained purchasing a second home in another city which is then locked up for a number of years and then sold at a massive profit is very tempting. Unfortunately the price is too high to even afford your first home leave alone the second home. Real estate investment trusts popularly called REIT may help you to realize huge returns in real estate.
What is a real estate investment trust?
- REIT’s are similar to mutual funds and are governed by SEBI rules and regulations and are listed on a reputed stock exchange. They have a manager, a trustee and a sponsor who handle the REIT.
- Mutual funds invest in stocks or bonds while REIT’s invest in revenue generating commercial properties (real estate).
- You and a number of investors pool in small or large sums of money and invest in the REIT. You are assigned units of the REIT in whatever proportion you invest.
- These are close ended schemes (you have to stay invested in the REIT for a fixed period of time).REIT’s invest your money in revenue generating commercial properties (think office space in metro’s and large cities).
- Over 80% of the money (Yours and other investors) is invested by the REIT in completed commercial real estate projects and part of the remaining amounts is invested in under construction commercial real estate projects.
Where do real estate investment trusts invest your money?
Up to 80% of (your money and the other investors money) is invested in completed revenue generating commercial properties of good repute called Grade A properties.
The remaining 20% is invested in
- Commercial properties under development (These properties can be obtained at a cheaper price as they are under construction).
- Government securities (bonds and treasury bills)
- Equity shares of reputed Companies listed on a recognized stock exchange which get at least 75% of their operating revenues/income from real estate projects.
- Money market instruments (Certificates of deposit, commercial paper of reputed Companies)
- Bonds of Companies which may be listed /non listed and deal in real estate.
How do REIT’s make money?
REIT use your funds to purchase revenue generating commercial property. This is then rented out to reputed Companies. (Property leased and rented by reputed Companies) in metro’s and large cities. These properties can give returns as high as 10% on the money invested.
Commercial property can be sold after a period of time for a profit called capital gains if its value increases.
What you need to know about REIT’s?
- The minimum amount you must invest in an REIT is INR 2 Lakhs. This is a small amount when compared to lakhs of rupees you need to invest to purchase a plot of land or a second home (residential apartment for investment purposes).
- Mutual fund units can be as cheap as INR 10-50 per unit. Each unit of an REIT is as high as INR 1 Lakh. (Minimum lot size of INR 1 Lakh).
- Real estate is traditionally illiquid (Difficult to buy or sell) in India. There is no regulator for real estate in India and buyers of real estate have no rights. Every rule favors builders and you are at their mercy. REIT’s are listed on the stock market and can easily be bought or sold.(highly liquid).
- If you invest in real estate in a single plot of land it might get encroached by squatters (Legal complications). The developer/builder could run away without completing the building. You would suffer a huge loss .No such problem if you invest in REIT.
How can you make money in an REIT?
- REIT’s in India invest in revenue generating commercial property and not residential projects. Residential projects do not give returns as high as commercial real estate.
- Reputed Companies take up office space in these commercial projects. Leasing and rentals of commercial office space in large cities by reputed Companies (Grade A projects) can fetch returns as high as 10% on the investment made by the REIT.
- The REIT pays you dividends out of rentals and lease collected from the revenue generating commercial real estate based on the units you hold. (Proportions you hold).
- The rentals would be collected on a regular basis (monthly) and dividends are paid out to you.
- If the commercial properties rise in value (appreciate) they might be sold by the REIT and the profits distributed as per the units you hold.
- The main aim of the REIT is rentals on commercial property and not selling and making a profit out of this.
Who can invest?
Currently HNI and the rich can invest but in a few months time all investors who want to invest in real estate and make a profit with only INR 2 Lakhs can do so.
Changes in the Union Budget 2014-2015 aid REIT’S?
The Union budget 2014-15 gives pass through tax status to REIT’s. This means income/profits from the REIT will be taxed in your (investors) hand and not in the hand of the fund (REIT).
This avoids double taxation and this benefits REIT’s in India making them hugely popular.