InvestorQ : What are the benefits of investing in real estate trusts? Is it better than equity and debt investing?
Mahima Roy made post

What are the benefits of investing in real estate trusts? Is it better than equity and debt investing?

Aditi Sharma answered.
2 years ago

I suppose you are talking about real estate investment trusts (REITs). Currently, we have one listed REIT which was floated as a REIT IPO by the Embassy Group of Mumbai. What is important is that REIT offers an additional asset class for you to invest in. Before embarking on REIT investment, you need to be familiar with the benefits. Here are some key advantages to know about.

a) Investing in REITS is a great and efficient way of doing portfolio diversification. For example, if you are holding equity and debt and want to diversify into gold and property, how do you do it? Gold can be done through gold bonds and gold ETFs. In case of real estate investments, you can manage them via REITs. It is a good way of investing in realty via the security route.

b) Like in the case of mutual funds REITs offer a simple and sophisticated means of holding property. You can hold it in the form of securities in your existing demat account itself. No worries about maintenance, stamp duty, transfer charges etc. For real estate as an investment other than owning a property for residence, REITs can be more suitable.

c) REITs are currently permitted to be offered only on commercial property. Since it is difficult for small and medium sized investors to buy a share in commercial property, REITs give that benefit. Also yields on commercial property are much higher in India compared to residential properties and that should mean higher yield.

d) You must be aware that the regulator SEBI has cut down minimum investment requirement in REITs from Rs.2 lakhs to Rs.50,000 and that makes it a lot more of a retail product. This makes REITs a lot more accessible to small and medium sized investors, who also get an opportunity to participate in commercial property investments.

e) The most important thing about REITs is that it is also tax efficient for an investor. The REIT is an intermediary like a mutual fund and hence there is not tax on any dividends distributed by the REIT. This tax advantage substantially enhances the post tax yield of REIT investments to the investor in net tax terms.

You can also look at the downside risks if any to REIT investment. Are there are any risks to investing in REITs? Of course, REITs offer a stake in commercial property and hence the value of your REIT will depend on the market value of such properties. To that extent there is a price risk that is in built in the asset class. As we have seen in the past, property prices are subject to demand and supply and prices can be quite volatile. Also, there is no history of REITs offerings in India and hence this is somewhat like a blind date for the investor.

While there are challenges, this is a good start towards creating an additional asset class. As of now, Embassy REIT is the only option you have but that has also run up quite a bit. It may be a few years before we can have some documented data on past performance and returns. Notwithstanding these risks, REITs offer a unique and intelligent means for investors to participate in real estate as an asset class. If you are looking at real estate as an investment, this is surely a choice you must look at.