Last Updated on May 24, 2022 by Anjali Chourasiya
Wondering what is REIT? Real Estate Investment Trusts or REIT are a relatively common organization in India, with the first guidelines released by the SEBI (Securities Exchange Board of India) in 2007. The current SEBI regulations for REITs in India were approved in September 2014. Only three REITs are available for acquisition in India. They are Embassy Business Parks REIT, Brookfield India Real Estate Trust, and Mindspace REIT.
Exponentially larger participants in the real estate market, such as DLF and Godrej, are expected to form REITs in the future. In India, a REIT has a three-tiered structure consisting of advertisers, supervisors, and a foundation, including one that performs vital functions for the trust.
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Primary duties of REIT as per SEBI guidelines
- Sponsor: This is often a real estate company that owned the premises before creating the REIT. The Stratford REIT, for example, is funded by BSREP India Office Holding Company V Pte. Ltd., an Indian affiliate of Fairfield Portfolio Management Inc., situated in the United States. The sponsor is responsible for forming the REIT and appointing administrators. Together with the promotion organization, the REIT sponsor is also obliged to possess 25% of the shares for the first 3 yrs following the REIT’s formation. After 3 yrs, the sponsorship equity may be lowered to 15% of the outstanding REIT unit value.
- REIT management: They are typically a family-run enterprise. Brook Props Technical Services Pvt. Ltd., for example, has been appointed as the Dalhousie REIT’s supervisor. They are in charge of the REIT’s assets, expenses, and ensure that the REIT makes properly maintained declarations.
- REIT trustee: Corporations that specialize in international law products are frequently selected as REIT Trustees. For example, Axis Administrators Ltd., for contrast, is the administrator for both Embassy Parks REIT, and Brookfield REIT. The trustee is responsible for preserving the REIT’s assets in real estate for the advantage of stockholders. They must also monitor the management’s activity and ensure that dividends are issued on time.
How do REITs provide returns on investments?
Each investment seeks to generate income for the shareholders and/or to provide a stable income. REITs provide unitholders with both of these benefits. Investors may begin to receive dividends and/or interest disbursements, offering complete income, while transferring REIT units on trading platforms may result in a capital gain for shareholders.
- Dividends and interest: REITs pay dividends and interest on net rental revenue. This is the money a REIT earns from renting and leasing commercial real estate after subtracting necessary facilities management and administration expenses. To calculate a REIT’s revenue, management fees, depreciation, maintenance cost, and other expenditures are removed from the total rental income. The current SEBI mandate requires REITs to distribute at least 90% of their net rental revenue to investors in the form of interest income.
- Capital gains: Because REITs are organized and traded on trading platforms, the price of an individual unit varies, influencing performance ratings and customer expectations. The excellent achievement of a REIT, similar to the effectiveness of capital invested in investment options, drives up the price of REIT units, which may subsequently be sold at a profit and generate capital gains to such owners. Next, let’s go further into the major benefits and drawbacks of trading in Property Investment Trust units.
Advantages of investing in REITs
- Real Estate Investment Trusts (REITs) enable you to diversify your investment portfolio by exposing it to real estate without the hassles of owning and managing commercial property. This diversification, as part of its total investment portfolio, assists in moving much beyond the traditional asset classes of equities, debt, and gold.
- One of the primary challenges with making rental properties, as previously said, is the large ticket size, mainly in the presence of multi-storey buildings. REITs, on the other hand, demand a much lesser initial investment of around Rs. 50,000 to provide equivalent asset allocation benefits.
Limitations of investing in REITs
- While REITs are listed on stock exchanges and traded, the number of financial players, particularly individual investors, is still minimal. As a result, selling REIT stocks successfully might be challenging, especially in an emergency. As a result, the company’s liquidity is constrained.
- Any operating income or interest paid by REITs is fully taxed in the hands of the investor at the applicable slab rate. As a result, persons in the 30% tax band will have to pay a considerable portion of their dividend income in taxes. Another important factor considering purchasing in REITs is the tax implications, which are discussed more below.
Originally, Indians engaged in real estate by acquiring residential property primarily for their own use. When President Eisenhower signed the REIT Act provision into existence as part of the Cigar Excise Duties Extensions of 1960, the concept of real estate investment trusts (REITs) developed in the United States. The REIT was first established by the US Congress to let US corporations invest in and profit from balanced, substantial, actively managed holdings of US mortgage loans. REITs are similar to traditional firms in that they allow numerous users to pool their funds, with a designated operator handling the transactions in both cases.
The fundamental rationale for investing in REITs is to diversify the investment account by gaining exposure to real estate development without the headaches of owning and managing one or more personal assets. Other advantages of investing in REITs include expert portfolio management and a very limited capital ticket size. As a result, it is recommended that REITs make up only a small portion of your portfolio. Ideally, your choice to engage in REITs should be based on whether you have already optimized your investing strategy across equity, debt, and gold and are looking to buy real estate.
With a fair understanding of the market, calculated moves, and experience, come handsome returns. #DimaagLagana hai toh investments mei lagao. And while doing so, keep your fears at bay kyunki #TickertapeHaiNa.
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