Sandeep P • 26 Aug, 2024

Understandings REITS in India.

It’s often said that real estate is an essential part of a discerning investor’s portfolio: after all, in the words of Mark Twain, “they’re not making it any more,” and property prices have risen decade after decade.

However, there is a world of difference between pithy sayings and profitable investments. Many would-be investors have poured their life savings into purchasing property, only to find themselves saddled with an illiquid asset and rental income that is anything but passive.

Obviously, then, not all real estate opportunities are created equal. In particular, the truly lucrative returns appear to be the purview of institutional investors, who can deploy vast sums in exchange for deep discounts on the property prices. What is an individual investor to do?

Enter the real estate investment trust, or REIT.

Put simply, a REIT is a company that purchases, owns, and operates income-producing real estate. These companies, both public and private, offer a typical investor access to the kind of high-ticket investments that would otherwise be out of reach. 

The format of these corporations is similar to a mutual fund, in that numerous investors pool their capital. The difference is that instead of buying stocks, the company acquires property, which is fractionalized. The individual investors are issued units representing this fractional ownership.

This has five major benefits for the participating investors:

1. Regular, effortless passive income:

• Each property is selected by the REIT based on its profitability, and that profit is passed on to the individual investors. In the Indian context, this has a regulatory guarantee: SEBI requires the company to pay out 90% of the distributable cash flow.

2. Access to institutional-grade returns:

• It’s common sense that negotiating with a war chest of crores makes for better deals than approaching a developer with just a few lakhs. REITs are able to garner deep discounts when acquiring assets, and they pass those discounts on to their participants.

3. Relentless capital appreciation:

• Coming back to Mr. Twain’s quote, real estate prices have reliably risen in India across the past three decades. Accordingly, the value of a REIT’s assets will see similar appreciation - as will the investor’s portfolio.

4. Easy Liquidity:

• Selling a flat or plot of land is often a headache. Finding buyers for massive tech parks and societies is far harder. Selling shares in a REIT? As easy as selling any other SEBI-regulated product listed on public exchanges.

5. Built-in diversification:

• An individual property is vulnerable to numerous potential risks, from local market conditions to disruptive neighbors. REITs, in contrast, typically hold properties across different geographic areas and asset classes, making them resilient against unexpected local shocks.
• While many first-time investors are unfamiliar with the asset class, REITs in India are actually a decade old, having been cleared by SEBI in 2014. There are currently four REITs listed on the stock exchange, totalling Rs 90,000 crore worth of assets. As a regulated asset class, there are numerous provisions to ensure that the trusts adhere to best business practices: for example 80% of their assets have to be fully constructed properties, preventing excess speculation on under-construction assets.