Infrastructure is one of the main forces behind the overall growth of any nation. In India, infrastructure and real estate work hand in hand, and both are regularly supported by the government to ensure sustained economic growth.
Demand for commercial space and lodging is increasing as the real estate sector expands and the corporate environment develops. Due to a lack of public finance, the property business constantly needs a new source of funding.
This is when Real Estate Investment Trusts (REITs) enters the investing market.
What are REITs?
A real estate investment trust (REIT) is a type of fund or instrument that makes investments in properties with the potential to generate income. To invest in commercial assets including office and apartment buildings, warehouses, hospitals etc.
This fund is run and managed by a corporation of shareholders who make financial contributions. A real estate investment trust offers significant returns to investors, unique tax treatment, and is listed publicly on a stock market.
Just like other investments, REITs allow both small and large investors to obtain ownership. The main aim is to provide strong income and investment opportunities.
REITs have some requirements:
- There must be at least 100 shareholders or investors in each REIT, and no one may own more than 50% of the shares.
- Must invest at least 75% of its assets in cash, treasuries, or real estate.
- Real estate investments must account for 75% of its overall revenue.
- Must pay shareholders dividends that are at least 90% of their taxable revenue.
- Governed by a board of trustees or directors. REITs-
Types of REITs
To understand REITs even better. Here are the different types of REITs:
It deals with running and overseeing commercial buildings that provide money. Notably, rentals are a typical source of income in this area. It is one of the most used and common types of REITs.
It mostly deals with offering mortgage facilities and lending money to business owners. Additionally, REITs frequently buy mortgage-backed securities. Mortgage REITs also make money through interest on the money they lend to business owners. It is also known as mREITs.
With this choice, investors can diversify their holdings by putting money into equity and mortgage REITs. Therefore, the sources of income for this specific type of REIT are both interest and rent.
This trust works as a private placement, which exclusively serves a restricted group of investors. They are often not listed on national securities exchanges and are not SEBI-registered.
5. Publicly Traded REITs-
They are open to the public and often provide shares that are listed on the National Securities Exchange and subject to SEBI regulation. Through the NSE, individual investors can buy and sell these shares.
6. Public Non-Traded REITs-
These REITs are SEBI-registered but not publicly traded. In comparison to publicly traded, non-traded REITs, these alternatives also have less liquidity. Additionally, because they are not affected by market movements, they are more stable.
Pros and Cons of REITs
Investors who always invest their funds in REITs can have both pros and cons in the following ways:
- Liquidity- Funds can be easily sold or bought in the market.
- Performance- due to the consistent long-term appreciation of commercial assets, historically proved to perform effectively.
- Transparency- REITs trading on significant stock exchanges is subject to the same regulatory and reporting requirements as other publicly listed securities.
- Diversification- Because REITs typically have a low correlation to the performance of other asset classes, having a REIT in an investment portfolio is advantageous when other stocks or securities are declining.
- Dividends- give investors a steady income stream because 90% or more of the profits are distributed back to them.
- Slow growth- because only 10% of the earnings can be invested back into the company because 90% of it is returned to investors.
- Higher tax payments- unlike most dividends, which are subject to the 15% rule, dividends are taxed at the same rate as normal income.
- Minimal control: Investors have little power over business choices like who owns buildings and how to trade the markets.
- Owing diligence must be used since investment risk can be high due to variables that may have an impact on the real estate market, such as property valuation, interest rates, debt, geography, and tax regulations.
- High transaction and administrative costs are levied by some REITs, which tend to reduce the net return to investors.
The SEC (Securities and Exchange Commission) says that investors should be wary of anyone who tries to sell REITs that are registered with the SEC.
The commission also advises that every real estate or commercial property owner should hire a broker or have an investment advisor who recommends the REIT.
For new investors or people who are starting up a property business, REITs make real estate involvement straightforward. There are many things to know when you are new to selling or buying land. This is why Property Business is here to provide you with any information you need, whether it’s about residential, commercial, or the Vastu Shastra of a property.