REITS or Real Estate Investment Trust is a company that owns, operates, or finances income-producing real estate properties. They pool money from the investors and invest it in commercial real estate projects like workspaces, malls, etc. Real estate is a good investment option as it allows you to diversify your portfolio beyond bonds and stocks.

Consider an example with “XYZ REIT,” which specialises in the ownership and management of shopping malls spread across various cities in the country. Instead of purchasing an entire shopping mall, individual investors have the option to acquire shares of ABC REIT.

When investors buy shares of “XYZ REIT”, they essentially become partial owners of the portfolio of shopping malls that the REIT owns. As the shopping malls generate rental income, ABC REIT distributes a portion of that income to its shareholders in the form of dividends.

From REIT investments investors earn returns through dividends (rental income) and capital gains (unit price appreciation) if the value of the real estate assets increases over time.

Types of REITs in India

The primary types of REITs in India are:

Equity REITs-  Equity REITs are the most common type of REIT. It invests in and owns income-producing real estate properties. These properties can include commercial properties or office spaces. The revenue generated is generated by rentals and sale transactions, which are distributed to the shareholders as dividends.

Mortgage REITs-  also known as mREITs, lend money to real estate owners and operators. These REITs invest in real estate debt such as mortgages or mortgage-backed securities. They generate income primarily through interest on these investments.

Hybrid REITs- Hybrid REITs offer the combined benefits of Equity and mortgage REITs. These REITs combine equity and mortgage REIT structures, owning both real estate properties and mortgages. Hybrid REITs offer diversified income streams from  both rental and interest income.

Infrastructure REITs (InvITs)-  InvITs are a type of investment vehicle that allows investors to invest in infrastructure projects. The main objective of InvITs is to provide retail investors with access to investment opportunities in infrastructure projects that were previously only available to large institutional investors. InvITs focus on infrastructure assets like roads, highways, and power transmission projects. Examples include IRB InvIT Fund and India Grid Trust.

How REITs work?

A REIT (Real Estate Investment Trust) a trust-based company raises funds through an Initial Public Offering (IPO) to acquire, develop, manage, and sell real estate assets. Similar to other security offerings, REIT IPOs follow strict regulations, including prospectus requirements and reporting standards. However, instead of purchasing stock in a single company, investors in a REIT buy units representing a share in a diversified pool of managed real estate. This portfolio generates income through activities like renting, leasing, and property sales, with earnings regularly distributed to unit holders.

REITs work like mutual funds. Mutual funds pool money from multiple investors and then invest in various asset classes like equity, debt, gold, etc. Similarly, REITs pool money from various investors and then invest the corpus in income-generating assets.

REITs pool funds from multiple investors to buy income-generating real estate (e.g., office spaces, malls). 80% of assets must be in completed, revenue-generating properties. As per the SEBI guidelines, they must distribute 90% of their earnings to the investors.

Notable REITs in India

1. Embassy Office Parks REIT: The first REIT in India, focusing on premium office spaces.
2. Mindspace Business Parks REIT: Specializes in commercial properties across major cities.
3. Brookfield India REIT: Concentrates on commercial office assets.

Eligibility Criteria for REITs in India

This table summarizes the key eligibility conditions REITs must meet to operate and list in India under SEBI (REIT) Regulations, 2014.

Key Benefits of Investing in REITs:

• Regular Income: REITs distribute 90% of net income as dividends, ensuring steady income for investors.
• Liquidity: Listed on stock exchanges, REIT units can be easily bought and sold like shares.
• Diversification: Provides exposure to a portfolio of high-quality real estate assets, reducing risk.
• Low Entry Barrier: Enables investment in premium commercial properties at a fraction of the cost of direct ownership.
• Professional Management: Properties owned by a REIT are managed professionally. This ensures smooth operations with no effort on your part toward managing Commercial Real Estate.
• Transparency: Governed by SEBI regulations, ensuring strict compliance and regular disclosures.
• Inflation Protection: Rental income and property values typically increase with inflation, offering a hedge.
• Tax Advantages: Tax-efficient structure reduces the overall burden on investors.

REITs are transforming the real estate investment landscape in India, making it more accessible, transparent, and investor-friendly. By combining the stability of real estate with the liquidity of stock market investments, REITs offer a compelling opportunity for both retail and institutional investors. As India’s real estate market grows, REITs are poised to play a pivotal role in channeling investments into high-quality real estate assets, contributing to the sector’s long-term growth.