Real Estate Investment Trusts (REITs): Meaning, How It Works and How to Invest?

Real Estate Invest Trusts (REITs) are defined a type of alternative investment fund that pools money from multiple investors with the purpose of financing, owning and operating income-generating real estate. Investors can purchase and trade units of REITs on the stock exchange in real-time similar to exchange traded funds (ETFs) in India.

In case of a REIT, the underlying asset of the scheme are real estate properties that generate income through rent and mortgage income. This income is subsequently distributed to investors in the form of dividend or investors can sell REITs units on the stock exchange for a profit in order to get return on their investment. Additionally, REITs units can be purchased with an initial investment starting at as low as Rs. 25,000 making it a more viable option that expensive purchase of commercial property.   

There are various types of REITs available in India based on the type of real estate holdings the trust invests in. Below are the different types of REITs that you can invest in:

A clear understanding of how Real Estate Investment Trusts in India are structured and operate is essential to help you decide if they are a suitable investment for you. Real Estate Investment Trusts in India are structured similar to mutual funds in India as both investment options allow multiple investors to pool their investments and the funds thus collected are professionally managed by a designated Manager of the REIT in accordance with SEBI (Securities and Exchange Board of India) guidelines approved in September 2016. Additionally, a REIT is also similar to Exchange Traded Funds (ETFs) in India as units of both investments can be registered and traded on stock exchanges. 

When a real estate company decides to create a Real Estate Investment Trust for buying, owning and operate real estate properties, the first step is the appointment of a Trustee who assumes Trusteeship of the assets of the trust. This way the real estate company becomes a sponsor and relinquishes direct control of the real estate assets. Typically, direct ownership of these assets is maintained through a SPV (Special Purpose Vehicle) that operates as a separate entity from the sponsor. However as per existing regulations the sponsor is required to maintain at least 50% or higher stake in the SPV thus created. 

The key components of the structure of REITs in India are similar to the 3-tier structure of different types of mutual funds such as:

Investment in REITs mandatorily require a demat account in India. Additionally, you will also need to have access to a trading account through a broker or brokerage firm. Investors can also choose between a discount broker or a full-service broker. The latter is more expensive but also would provide advice regarding which REITs to invest in. A discount broker, while less expensive, might be a good fit for you only if you are well-versed regarding how financial markets work.

In order to make such financial transactions, you will also need to complete the applicable Know Your Customer (KYC) requirements by providing key KYC documents like Aadhaar, PAN, etc. Another requirement to consider is the minimum investment amount that is required. Currently the minimum number of REIT units you need to buy in India is 1 unit and the minimum investment required is between Rs. 10,000 and Rs. 15,000 for a lump sum investment.   

In India investors can get income from REITs in 3 ways – interest, dividend and capital gains. Here is how it works:

If you are looking to diversify your investment portfolio through exposure to real estate holdings, REITs are a good option due to the low cost of investment as compared to direct holding of real estate. Moreover, unlike typical real estate holdings, Real Estate Investment Trust units are more liquid as they can be redeemed with relative ease.

However, one needs to keep in mind that like other market-linked instruments, REITs also feature a significant level of risk depending on the performance of the stock market as well as the underlying real estate assets. So do consider applicable risks before seeking portfolio diversification through REITs investments.