What are Real Estate Investment Trusts? Are they available in India yet?

Dec 19, 2018 | 10 months ago | Read Time: 3 minutes | By iKnowledge Team

Real Estate Investment Trusts are funds that pool in money from multiple individuals and invests this into real estate, allowing individuals to be a part of the real estate growth without requiring massive amounts of capital.

Real Estate Investment Trusts (REITs) are like mutual funds, but the mainis that investments are  made on properties like buildings and land instead of stocks and shares. Similar to mutual funds, REITs are flow-through entities which help in distribution of the majority of income cash flow to investors without taxation at the collective level.

How does a REIT work?

The most important advantage of REITs lies in its liquidity. It allows investors to take part in the traditionally illiquid real estate market while also getting liquidity akin to the share market. Like most closed-end funds, REITs are swapped on major exchanges. It makes an REIT similar to any other stock that signifies ownership in a running business. 

REITs are a dividend-paying asset that concentrate on real estate. REITs gain money through an initial public offering (IPO), which is then used to buy, manage, develop and trade holdings in real estate. These IPOs are similar to any other security, offering identical rules concerning plans, reporting requirements and guidance. Nevertheless, instead of acquiring stock in a particular company, the buyer of one REIT unit is buying a part of a managed fund of real estate. These controlled funds generate income by leasing, renting and selling  property and then distribute it directly to the REIT holder.

Availability in India

The REIT program has been already approved by the Securities and Exchange Board of India (SEBI).  The funds collected from the REITs will contribute to commercial properties with the intent to generate income.

The most significant element that an REIT will offer in India is that an investor can start with a small amount of ₹2 lakh to purchase entities in exchange.

A REIT must get registered via an initial public offering. SEBI has currently kept the minimum asset sizes to be invested in at Rs 500 crore while the minimum issue size could be less than Rs 250 crore.

REITs in India are aimed towards enabling more funding for the real estate sector, fueling a boom in the space. Giving India’s growing economy and increasing population, specially in the urban areas, the real estate sector is a promising sector for retail investment.

How do REITs work?

REIT is a means to generate funds from a large number of investors who put their money towards real estate properties like corporate buildings, residential parks, hotels, shopping malls and warehouses. All REITs that get listed with SEBI would function like structured trusts. As a result, REIT assets will be managed by independent trustees for unit holders.

Why trustees?

Trustees with REITs have defined roles which involve secured agreement and commitment to all relevant laws that shield the rights of the investors.

Objective of REITs

A REIT aims to provide the investors with profits that the capital gain collects from the sale of the commercial assets. The trust distributes 90% of the income among its investors via benefits. Apart from the minimum entry size, a REIT is also considered to provide variety and safe investment opportunities with reduced risks, and under professionals to make sure that investors get maximum return on their investments.

The primary objectives are as follows:

  • Transparency: REIT will showcase the full valuation on a yearly basis and will also update it on a half-yearly basis.
  • Income dividends: 90 percent of distributable cash at least twice in a year.
  • Lower risk: At least 80 percent of the assets should add towards income-generating and finished projects. The rest 20 percent of the assets include properties like under construction projects, equity shares of the listed resources, mortgage-based securities, money market instruments, cash equivalents and real estate activities.
  • Diversification: REITs must invest in a minimum of two projects with 60 percent asset value in a single project.

Conclusion

The concept of REIT has been in the news for a long time. However, the regulations have not helped bring them to starting ground in India. REITs exemption from tax on the distribution of dividends would make it very attractive for all investors.

 

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