Real estate has traditionally been considered one of the most preferred investment options for long-term wealth creation and regular income generation. However, buying physical property often requires large capital, ongoing maintenance, and active management. For investors looking to gain exposure to real estate without directly purchasing property, Real Estate Investment Trusts (REITs) have emerged as an alternative investment option.
One such query came from Reshma, a viewer of The Money Show on ETNow, who wants to know about REITs, wants a real estate exposure in her portfolio and for that she is considering REITs and she wants to know each and every aspect about investing in this kind of an asset class.
Answering to this query, the expert, Harshvardhan Roongta, CEO, CFP, Roongta Securities explained how REITs work, who they may suit, and how investors can use them for portfolio diversification and regular income generation.
What are REITs and how do they work?
According to Roongta, REITs allow investors to participate in the real estate market without owning physical property directly.
He explained that in traditional real estate investing, an investor typically purchases a property such as an office space or apartment using a large amount of capital and then manages the property independently to earn rental income and potential appreciation. In contrast, REITs function somewhat similarly to mutual funds by pooling money from multiple investors and investing in a portfolio of income-generating real estate assets.
“One is to buy real estate or say office promises or whatever to invest into real estate is that an individual goes picks one…, identifies an office space or a residential apartment, buys that real estate and invest, so there is a large chunk of money that you have to put, it could be say for example Rs 1 crore to be starting with. Now, you manage that property, you do everything, you earn rental income on it ,” Roongta said.
He further said that the other option is a real estate investment trust. Just like mutual funds this real estate investment trust, the REITs would basically be holding a basket of real estate. So, they would go and buy say in multiple offices or they will own buildings altogether which is say an office premises.
They will lease out those office premises to several corporates and generate rental income. There will be capital appreciation, etc, and the owners of that trust will be the units. Investors buying units of a REIT effectively become co-owners of the underlying real estate assets held by the trust.
He added that this structure allows investors to participate in real estate with much smaller investment amounts instead of committing a large sum required for direct property ownership.
Types of REITs available for investors
Roongta highlighted that the REIT ecosystem in India has evolved significantly in recent years and currently offers multiple options for investors and very actively there would be about four REITs that you can consider.
Also Read | Direct stocks or mutual funds? Expert shares strategy to achieve Rs 7 crore goal in 12 years
He mentioned Embassy Office Parks REIT as the largest REIT currently available in India with assets under management of around Rs 50,000 crore. Other office-space focused REITs include Mindspace Business Parks REIT and Brookfield India Real Estate Trust.
These three are exclusive into office space, they primarily own and lease office properties to corporates and multinational companies. There is a rental income that is earned out of this which the ownership of that trust unit holders are entitled to.
Apart from office-focused REITs, investors can also consider retail-focused REITs. There is another REIT available which invests into retail malls. In case you are an investor who believes that the retail malls have a good business to do, then there is Nexus which invests into that.
“Nexus Select Trust focuses on retail malls and may suit investors who believe retail consumption and mall businesses have long-term growth potential,” Roongta explained.
Where do REITs fit in an investment portfolio?
Based on investors’ query of investing into REITs, Roongta said that REITs may suit investors looking for returns higher than traditional fixed deposits but with relatively lower volatility than equities.
“I would place REITs somewhere between fixed deposits and equities in terms of risk and return profile. Those people looking to get a little better returns than fixed deposits or debt funds and with a lesser risk and volatility than equity, so this product basically fits in between these two categories for investors who are looking and the yields that you look at currently would be in the range of 6% to 9%,” he said.
He added that REITs can help investors diversify their portfolio through exposure to commercial real estate while avoiding the operational burden of managing physical property and they do not want to put a very large ticket size, so that is the placement of this product.
Can REITs generate regular income?
Roongta noted that REITs give out regular payouts and are also suitable for investors seeking periodic income. Under regulations, REITs are required to distribute a large portion of their rental income to unit holders.
Also Read | Can salary-linked SIPs transform mutual fund investing for salaried Indians? Experts weigh in
“There is a regular payout that comes in through reits because the regulations also say that whatever rental income is collected, it has to be about 90% I believe, it was 95% earlier which was reduced to 90%, there is a large chunk of the rent that is received by the REITs by the trust has to be distributed to the unit holders,” he said.
These payouts can come in different forms including dividends, interest income, or direct rental income distributions depending on the REIT structure and would straight away distribute the rental income. However, Roongta clarified that REIT payouts should not be viewed in the same way as guaranteed fixed deposit returns.
“The yields may currently range between 6% and 9%, but unlike fixed deposits, these are not fixed or guaranteed returns,” he added.
Who can consider investing in REITs?
According to Roongta, REITs may suit investors who want real estate exposure but do not wish to invest a large amount in physical property or deal with maintenance and tenant management issues.
He added that investors should understand the product structure and underlying assets before investing and should choose REITs that align with their investment objectives and risk appetite.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
If you have any mutual fund queries, message on ET Mutual Funds on Facebook/Twitter. We will get it answered by our panel of experts. Do share your questions on ETMFqueries@timesinternet.in along with your age, risk profile, and Twitter handle.
.png?w=600)
