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Demystifying Real Estate Investment Trust (REIT)

By on April 24, 2019

What are REITs?

If capital appreciation via real estate is your goal, then REITs are just your thing. Just like mutual funds invest in various securities like equity, debt etc; REITs invest in real estate securities but unlike mutual funds REITs are traded in the stock market. There are many investors amongst us, who would want to invest in the real estate sector in order to diversify our investments and also to gain profits; against buying one residential property and being married to it for life. Times are changing and so is the investment outlook. Regulated by the Securities and Exchange Board of India(SEBI), REITs invest in commercial real estate properties and investors can buy units of this fund via the stock market. The profits earned via rents and capital appreciation are then distributed to the investor in the form of dividends.

Need more clarity? Let us look at a hypothetical example. Assume that an REIT IPO has been launched and listed on both NSE and BSE. The units are priced at Rs 300 and the minimum application had to be of 700 units i.e. ~Rs 2.1 Lakh. There. You now have invested in real estate with a smaller sum of Rs 2 Lakh as compared to the Lakhs you’d have spent otherwise. Had you been investing in a stand-alone property even for the purpose of renting it out, could you have gained even a porch at Rs 2.1 lakh? Doubtful. So, just get a Demat account and get started!

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Dividends might be the most common way of distributing credits and as per the Income Tax Act, 1961, any form of earnings from REITs except interest and rentals shall be tax-free.

Advantages of REITs

  • Liquidity- REITs can be traded like any other mutual fund unit or stock, which is an immense enhancement from the liquidity offered by the traditional real estate purchases.
  • Affordability- REITs bring to table the most affordable way of investing in real estate with the lowest entry barrier and without the hassle of maintaining the property you buy.
  • Dividends- SEBI has made it clear that the REITs have to share 90% of any form of profit achieved via rents or capital appreciation with its investors at least twice a year. 
  • Diversification- REITs make the much sought-after investment diversification a reality and with much ease. It gives you a window to delve into a sector which otherwise would have been a bit expensive to start with.

Returns and Income Tax

Even though REITs are at an extremely nascent stage right now to be able to fairly gauge the returns, but it is speculated that a long-term return can be anywhere in the range of 8-15% once the REIT market has matured enough. However, REITs need to be looked at from a long-term investment standpoint only. Prices may fluctuate if the investment horizon is lower.

There are three ways, in which you may receive the proceeds from REITs- dividends, interest and rentals. Dividends might be the most common way of distributing credits and as per the Income Tax Act -1961, any form of earnings from REITs except interest and rentals shall be tax-free. For the latter, you shall be taxed as per the income tax slab. Similarly, the long term (>3 years) and short term (<3 years) capital gain taxes are applicable depending on the holding time of the units.

Final Word

If you feel wary of this form of investment, it is only valid because there is no history or trend line to assess. However, looking at the success of REITs overseas, we are only hopeful that it shall open doors of real estate to many new investors since it fights the biggest demons of this sector- affordability and illiquidity.

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