Real Estate Investment Trusts (REITs) pool money from various investors and invest in real estate ventures. While real estate ventures are usually too hard on the pocket for an average retail investor, investing in REITs gives her alternate channel of investing in this sector with an amount as low as Rs. 2 lakh.
REITs are a lot like mutual funds but with one major difference, which is, instead of buying equity funds or debt funds, REITs invest in commercial properties generating rental income. It is a medium for pooling in monies with the intention of investing in real estate. The REIT has to be listed on recognized stock exchanges and will be freely tradeable.
Benefits of investing in REITs
Professionally managed: Just as it is with mutual funds, REITs are also professionally managed. Hence, the common investor has the advantage of his money being managed by full time experts.
Ownership at low cost: The most salient advantage of investing in an REIT is that it gives investors an opportunity to invest in real estate ventures with a reasonably small ticket size. According to SEBI, an investor can buy units of REITs with a minimum investment of Rs.2 lakh. The investor will benefit from real estate price appreciation, without the hassle associated with buying and maintaining a property.
More Liquidity: Unlike directly investing in the real estate market, REIT investors have the advantage of greater liquidity as REITs will be traded on the stock exchanges just like any other equity shares.
Minimised risk: Investors get exposure to a large and diversified portfolio of real estate assets with REITs as opposed to having a single property exposure, thereby minimising the risk of the investor and helping her explore a wide range of investment opportunities.
Regular dividends: SEBI has made it mandatory for the REITs to distribute at least 90 % of their distributable cash flows as dividend on a half-yearly basis. For an investor this means a potential source of income in addition to capital appreciation at the time of redemption, which in turn increases the trading price of the REIT units.
Transparency: With a professionally managed trust, investors can rely on their disclosure standards, as REITs are required to make regular disclosures, including quarterly and yearly financial reports.
Though SEBI has not mandated any ceiling or limit on commission structure for REIT distribution, experts feel that REITs may offer an upfront commission in the range of 0.5% to 1% to distributors. However, the structure and quantum may vary from distributor to distributor and fund to fund.
Dr. Vikas V Gupta, Executive Vice President, Arthveda Fund Management, predicts that the management fee of the REIT should be around 2% along with a performance fee. “It is yet to be tested in Indian markets if REITs can bring in the type of income that would support this fee structure after the management fee and other expenses get deducted.”
Talking about the type of commission IFAs could look forward to, Vikas says, “Generally in these cases an entry load is levied on the investor, which is then passed back to the distributor. But in the absence of regulations in this regard, it is difficult to say how much IFAs can expect from this avenue.”
IFAs can look at diversifying their offering by adding REITs. The commissions offered by REITs are likely to be competitive.
REITs will not only provide a new source of cash to developers who have struggled to reduce their debt burden but will also give investors the ability to diversify their portfolios by owning real estate assets.