Real Estate Investment Trusts (REIT)

What is REIT?

Real Estate Investment Trusts (REIT) are securities linked to real estate that can be traded on stock exchanges once they get listed. The structure of REIT is similar to that of a mutual fund. Just like mutual funds, there are sponsors, trustees, fund managers and unit holders in REIT. However, unlike mutual funds, where the underlying asset is bond, stock and gold, REIT invests in physical real estate. The money collected is deployed in income-generating real estate. This income gets distributed among the unit holders. Besides regular income from rents, gains from capital appreciation of real estate also form an income for the unit holders.

Backdrop

REIT have been in the making for more than a decade in India, but it was only in October 2013 that draft guidelines were issued by the Securities and Exchange Board of India (SEBI). However, lack of clarity on tax implications on income earned and some other related aspects were holding them back from becoming a reality. In last few years, several amendments were made to make REIT more attractive. In the latest amendment on March 1, 2019, SEBI reduced minimum investment limit in REIT to Rs.50,000 from Rs.2,00,000.

Why to invest in REIT       

• REIT will ease the whole process of investing in real estate.
• The Investor only needs to have a demat account to invest.
• Direct investment in real estate is highly priced. But, units of REIT will be comparatively more affordable.
• Buying property directly would involve lot of due diligence. Investing through REIT will eliminate such complications.
• More transparency, as all relevant details will be available online for investors (since REIT units are listed in stock market).
• REIT dividend payment is relatively assured. Because most of their income is in the form of rental (lease) income.
• Dividends paid to investors by REIT are tax free.
• Buying REIT (instead of a property directly) will eliminate cumbersome steps like identifying good property, booking property, making self-contribution, arranging for balance funds (if loan is required), preparation of sale deed and other legal documents, registration of sale deed, handing over from present owner / builder, maintenance of property, etc.
• REIT is also regulated by regulator(s) which will further eliminate chances of any bungling commonly done by sub-standard builders.

Expected returns from REIT

Real estate as an asset class has always attracted investors. However, high-ticket size made it out of reach for many. But REIT can provide an option to retail investors to invest in high-end commercial real estate, as the minimum investment has been kept very less.

Commercial real estate provides returns between 8% to 10% per annum. However, grade A office space and commercial space in prime locations can provide even better returns. Typically, commercial leases are of long periods like six to nine years or even more, with rent escalation clause. Experts believe that this makes REIT less volatile than other investment avenues.

Tax on returns

Before considering investment in REIT, make sure that you are aware of the taxability on returns. According to SEBI Regulations, REIT is required to distribute 90% or more of its earnings, be it divided, interest or rents, to investors or unit holders at least twice a year.

Thus, income received from REIT is in the nature of dividend, rent or interest and distributed to its unit holders shall be deemed as dividend, rent or interest income, respectively, in the hands of unit holders.

According to section 10(23FD) read with section 115UA of the Income Tax Act, all the incomes received from REIT shall be exempt from taxation, except interest income received by REIT and rental income from property that is owned directly by REIT. Largely, REIT will distribute most of its income in the form of dividend, which is tax free in the hands of investor.

How REIT makes it

REIT is good for both Builders and Investors.

Builders can approach REIT for their working capital requirement. REIT can prove as an alternative to bank loans for builders. REIT will also work as financier for big real estate projects.

Investors can buy units of REIT to generate stable income for themselves. Instead of buying whole physical property, investors would prefer units of REIT, which will be a great investment option.