REITs may turn to be Best investment in India

REITs may turn to be Best investment in IndiaREITs may turn to be Best investment in India

This post is based on request from Magesh on "Suggest-a-topic" to write an article on REITs in India. Investment in real estate can be done by buying property or land or by investing in real estate fund with a minimum amount of Rs 1 Crore. However, what happens if there is a better investment option which can help investors to invest in real estate with small amounts like we invest in SIP in mutual funds every month? Real Estate Investment Trusts in India (REITS) proposal if approved, can make this dream true.

What are Real Estate Investment Trusts in India (REITs)

Last week SEBI issued draft guidelines about REIT in India. If this is approved, you can invest in REIT in India in small amounts and get rental income linked to real estate for the long term.

Also read: Home loans – Fixed interest rate Vs Floating interest rate – Which is better?

How do REITs in India work?

Any professionally managed body can register as trustee with SEBI and can set-up REIT in India. The trustee would be responsible for Trust operations. The trustee needs to invest for 25% in REIT at any point of time. They would be a professionally managed body like we have mutual fund houses. The product what we are talking is securitized investment in Real Estate. The sponsor will issue shares to REIT in one or multiple real estate properties and this value would be converted to units which you can buy. The best part is 90% of such projects should be in completed form. You would get immediate regular income from such investments.

Explained with example

  • Trustee "X" is registered under SEBI.
  • Sponsor Y has sold property to Trustee "X".
  • As an investor you can buy the units from X.
  • X would get rental income (after any charges) which would be passed on to you as you are investor.

Benefits from REITs in India

  • Liquid / Transparent investment option in Real estate
  • Investment can be made in smaller amounts in Real Estate. Small investors can be benefit more from this.
  • Such REIT’s would lease contracts on long term, hence rental income would be in long term nature.
  • You would know what they are buying, what is the value of such properties and what income you can expect from such properties.
  • The secondary market would be created for such securities and they can be purchased or sold in the open market.

Risks of REITs in India

  • Rental income may not continue for all projects for the long term. Rental income may be reduced during negotiations for some projects
  • Investment in one project may downgrade the value of assets due to real estate price fluctuations.
  • Since REIT is new in India, it may take some time for investors understand on how it operates.
  • Initially due to delay in forming secondary market, you may see liquidity issues.
  • Maximum cap on borrowings for such REIT are 50%. In case of bankruptcy, borrowers would be given preference for repayment.

Also Read: Is investing in home is equivalent to buying an asset or liability?

Is there any open issues which are not discussed ?

While the majority of them are discussed and clarity is yet to be evolved, taxation part for REIT is yet to be known. Many analysts indicate that SEBI need to see how we can provide tax benefits like it is being done for Mutual funds or Stocks to attract more investors into this investment option.

Final Conclusion: While REIT’s are famous across major countries, it is yet to be approved in India. Investing in small amounts in real estate is a good idea. Once SEBI approves, one need to do due diligence on how it runs and consider risks involved. Based on this, decision to invest in REIT in India can be made. We do not know, it could turn to be one of the best investments in India.

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REITs may turn to be Best investment in India


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