🏢 REIT - The Mutual Fund of Real Estate
Real Estate Investment Trust
Owning real estate is still a distant dream for most of us. Forget about commercial property, for a middle-class, getting exposure to residential property is also quite difficult. Are you one of those who wants to invest in real estate, but not able to do so due to high capital investments? If yes, then REIT might be for you, which overhauls the entire process of investing in Real estate.
What is REIT?
A REIT is a company that owns, operates, manages, or finances income-producing real estate.
Similar to Mutual Funds, REIT also acts as an investment vehicle that enables investors to invest and earn regular income through the underlying commercial real estate, without directly owning it. The investments can be made through a trust directly or via Special Purpose Vehicles (SPV). A SPV is a company with a separate legal entity created for a specific purpose. In case of a REIT, SPV is created for acquisition, development, investment and management of the real estate properties.
The REIT may generate revenue from dividends, rental income, interest from loans provided to SPV or real estate owners, investment in G-sec, bonds, etc. As per SEBI regulations, at least 90% of the income earned by the REIT must be distributed to its unitholders as dividends or interest.
Tax Implications for Unitholders
The unitholders generally derive income from REITs in the form of interest and dividends. Additionally, unitholders may also be entitled to capital gains.
Dividends: This is the most complex part of the REIT. The Dividend is exempt from tax in the hands of unitholders, where the SPV has not opted for the lower tax regime [under section 115BAA of the Income-tax Act]. In India, none of the listed REITs have opted for lower tax regime and hence, dividends are exempted from tax. in the hands of the investor.
Interest: The interest income distributed by REITs are taxed in the hands of the unit holder at the applicable slab rate.
Capital Gains: STCG Tax of 15% is applicable if units are sold within a period of three years. Any units sold after three years attracts a LTCG Tax of 10% on gains exceeding INR 1 Lakh, without indexation benefit.
Things you should know before investing in REITs?
REITs have the characteristics of both equity and debt. In India, we have REITs primarily focused on commercial real estate properties having 6-7% rental yields.
It provides a steady stream of income plus the potential capital appreciation.
The relatively low correlation of REIT returns with the returns of other equities and fixed-income investments also make REITs a good portfolio diversifier.
REIT returns tend to “zig” when those of other investments “zag” thereby, helps in reducing the portfolio’s overall volatility and improve its returns for a given level of risk.
REIT units have more liquidity than physical property. You can sell your REIT holdings on the exchange.
Lastly, adopt the "Landlord" mindset - Stay invested for the long term, be the owner of the properties and not the 'trader', and know your risk appetite.
💡 REITs make sense for those investors who wish to participate in the real estate sector without having massive budgets or major risks that Indian real estate comes with.