Introduction

Real Estate Investment Trusts (REITs) refer to companies that hold ownership and/or operations in real estate. To be considered a REIT, the company must invest a minimum of 75% of its assets in real estate and derive at least 75% of its revenues from real estate-related activities. India saw its first REIT in the year 2019. As of now, there are three REITs in India – Embassy Office Parks REIT, Mindspace Business Park REIT and Brookfield India Real Estate Trust. REIT investments make it possible to have exposure and invest in real estate without having direct ownership over the property. 

Categories of REITs

When it comes to types of REITs, equity REIT is one of the most popular ones wherein rent collected through the leased-out property and proceeds received from the sale of properties is distributed to shareholders. On the other hand, mortgage REITs (also called mREITs) though don’t own real estate, advance loans to finance real estate and make profits through interests. In the case of hybrid REITs, investors have the option of diversifying their portfolios by parking their funds in both mortgage REITs and equity REITs. Accordingly, both rent and interest constitute sources of income for this type of REIT.

Private REITs function as private placements, which cater to only a selective list of investors. These are not traded on National Securities Exchanges (NSE) and are not registered with the Securities and Exchange Board of India (SEBI).

Public non-traded REITs are non-listed REITs which are registered with SEBI to carry out activities under SEBI (Real Estate Investment Trusts) Regulations, 2014. However, they are not traded on NSE. They are comparatively more stable as they are not subjected to market fluctuations. Publicly traded REITs extend shares enlisted on NSE and are regulated by SEBI. Individual investors can sell and purchase such shares through the NSE. REIT companies listed on the Indian stock exchanges are monitored and regulated by SEBI to safeguard the interest of the investors and ensure adherence to industry practices.

Risks Involved

Non-traded and publicly traded REITs pose risks, and these are not necessarily categorised as disadvantages as the cost-benefit analysis and the choices made therein are based on the discretion of the investors.

Having said that, non-traded REITs carry a higher risk than public REITs since there is no information available in the public domain to enable investors to carry out research and determine their values. In this context, the element of trust is integral. They are illiquid and the potential of having a lock-in period for the same is high, meaning thereby that investors may not be able to access their funds for a predetermined period, sometimes up to seven years. Furthermore, non-traded REITs are known for incurring high upfront fees. In the case of publicly traded REITs, the biggest challenge is the high-interest rate risk.

Tax Implications

As mentioned above, shareholders receive dividends and capital gains by virtue of REIT investments and are accordingly required to pay tax on such gains. It is necessary to mention that the dividends received in this manner are not eligible for a lower tax rate and the shareholders are liable to pay the tax as applicable to ordinary income. This is from a shareholder’s perspective. REITs are also legally bound to pay tax and cannot claim any exception available to pass-through entities such as sole proprietorships, partnerships, etc.

Benefits and Limitations

Shares in REITs are affordable for investment, and it poses a good option for small investors. The publicly traded REITs are listed on the stock exchanges which means that potential investors will have access to detailed information and make choices accordingly. Another added advantage of choosing REITs over directly purchasing commercial properties is the prospect of receiving steady dividend income.

Although REITs pose a good investing option, some challenges cannot be overlooked. First, investors are required to pay high up-front fees. The extent of risks, in the long run, is also proportional to the number of investments made and the volatile nature of the real estate market could pose a challenge to earning dividends. REITs as asset classes can lead to investors having restrictions on selling shares for a period of time.

Conclusion

REITs can prove to be a suitable retirement investment considering the steady dividend income that arises out of such an investment and on account of their growth potential. Such an investment will also help in portfolio diversification. Hence, one can connote that REITs could be a good starting point for investors to include real estate in their investment portfolio provided that the risks involved are duly assessed and the applicable tax provisions are borne in mind.