Did you know you don’t have to own a home to make a real estate investment? That’s right, you can do it through Real Estate Investment Trusts or REITs.
The basic structure of a REIT is like a mutual fund. If it suits your risk tolerance, it can be a source of dividend income.
Let us talk about REITs.
What is REIT?
Real estate investment trusts or REITs are firms that own, operate and finance income-generating real estate.
Here, a company builds different real estate units. However, it will take them a lot of time to get their money back as rents. So, they can sell their rental units to a REIT trust. This REIT trust may also have different properties built by other firms.
Selling the units provides cash that the firm can use for a new project.
So, you may ask from where did the REIT trust get all this money? The answer is simple. It is from investors like you and me. We invest a particular amount in the REIT, and we get dividend income and capital appreciation in return.
So, you can think of REIT as a mutual fund scheme. Many investors invest their money in a REIT. And just like mutual funds, a designated manager manages this investment pool.
To be classified as a REIT, these real estate businesses must fulfil a set of criteria.
REITs are listed on the stock markets and allow investors to take part in real estate without owning or managing buildings.
Real Estate Holdings or loans backed by Real Estate are the primary underlying asset of REITs.
When you own REIT units, it signifies real estate ownership. So, you get a share of the profits that are distributed as dividends and capital gains.
Benefits of investing in a REIT
REITs focus on distributing regular rent from properties. SEBI requires REITs to distribute 90% of distributable cash flows to unitholders.
Over 80% of its assets must be finished and generate income. This lowers execution risk.
The sponsor must keep some REIT units, while they sell the rest to investors in an IPO.
It’s also difficult to sell a property quickly. But you can easily sell your units like stocks.
The new minimum application value is Rs.10,000-15,000, with a minimum trading lot of one unit.
Disadvantages of investing in REIT
There are no tax breaks for investing in a REIT.
The dividends from REITs may vary as per the market conditions.
REITs have little chance of capital appreciation. It is because they can invest back just 10% into their company. 90% is distributed as dividends.
Things that you should look at before investing in a REIT
Weighted Average Lease Expiry(WALE)
The vacancy is the leading risk to any commercial property. WALE shows the time in years that is left for the property to go vacant. The higher the figure, the better it is.
By law, REITs must pay investors 90% of distributable cash flows. Distribution yield measures these payments. It is not guaranteed, and the higher the distribution yield, the better it is.
Loan To Value
Loan to Value (LTV) compares the amount borrowed to the asset value. Like any business, less leverage is preferable.
Net Distributable Cash Flow
The NDCF shows how much money is remaining to give to unitholders.
Not all REITs are the same. Different REITs do not invest in the same properties or markets. It would help if you did your research before investing in a REIT. We hope you’ve learned some new information about REITs, which made you familiar with this new investment option.