BlogCatalog
REIT or Real Estate Investment Trust is a company that owns or funds the income producing Real Estate. REIT provides its investors all types of regular income streams, diversification and the long term capital appreciation. It allows every investor the opportunity to invest into large scale income producing Real Estate the way one would invest into stocks, mutual funds or debentures. It provides access to highly capital intensive large scale commercial Real Estate to the average investor.
What are the benefits of REIT fund?
Access to income producing Real Estate at low investment: REIT funds provide common investor an access to income producing large scale Real Estate with very low investment. Typically, if someone has to invest in a small commercial property of 500 sq ft in a city like Bangalore, you would have to make an investment of minimum Rs. 35 – 40 Lac. With REIT fund, you can reap the benefits of higher return on large scale commercial projects at the fractional cost (Rs. 1- 2 Lac)
· Diversification of your investment portfolio: It provides you an alternative and diversification to your investment portfolio. As mentioned in my earlier post, Real Estate is an important class to be a part of your investment portfolio and investing into REIT funds provide you that diversification. Also returns in REIT have a very low correlation to the Broader markets and thus are very consistent. This also reduces the risk in your investment portfolio
· Inflation Protection: REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.
· Performance: REITs across most of the international markets have delivered better growth and income as compared to most of the asset classes like corporate Bonds etc
· Liquidity: REITs are listed on the stock exchanges and are trade-able instruments thus providing easy liquidity as compared to the Real Estate investment.
· Transparency: REITs are professionally managed funds with very strong corporate governance rules applicable to them. They are traded in open markets and thus are transparent to Markets as well as there is transparency in taxes applicable on returns generated through them.
In addition to the investment performance and portfolio diversification benefits available from investing in REITs, REITs offer several advantages not found in companies across other industries. These benefits are part of the reason that REITs have become increasingly popular with investors over the past several decades.
REITs' reliable income is derived from rents paid to the owners of commercial properties whose tenants often sign leases for long periods of time, or from interest payments from the financing of those properties.Most REITs operate along a straightforward and easily understandable business model: By increasing property occupancy rates and rents over time, higher levels of income may be produced. When reporting financial results, REITs, like other public companies, must report earnings per share based on net income as defined by generally accepted accounting principles
Types of REITs:
REITs are classified into 2 broad categories:
Equity REITs:
Equity REITs mostly own and operate income-producing real estate. They increasingly have become real estate operating companies engaged in a wide range of real estate activities, including leasing, maintenance and development of real property and tenant services. One major distinction between Equity REITs and other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own portfolio rather than to resell them once they are developed.
Equity REITs mostly own and operate income-producing real estate. They increasingly have become real estate operating companies engaged in a wide range of real estate activities, including leasing, maintenance and development of real property and tenant services. One major distinction between Equity REITs and other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own portfolio rather than to resell them once they are developed.
Mortgage REITs:
Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Today's Mortgage REITs generally extend mortgage credit only on existing properties. Many mortgage REITs also manage their interest rate and credit risks using securitized mortgage investments, dynamic hedging techniques and other accepted derivative strategies.
Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Today's Mortgage REITs generally extend mortgage credit only on existing properties. Many mortgage REITs also manage their interest rate and credit risks using securitized mortgage investments, dynamic hedging techniques and other accepted derivative strategies.
The 3rd category that has started emerging is the Hybrid category that deploys funds in both the above categories i.e. direct investments into properties as well as mortgages.
REITs are strangers to Indian market. SEBI on 26th September 2014 laid the detailed framework for the registration and regulation of REITs in India. Post that some of the large Real Estate companies like DLF have started readying for the launch of their REIT funds. This is the asset class that will see a lot of activity in coming 8 to 12 quarters once the economy picks up demand for Real Estate starts picking up.
Do revert with your comments and feedback.
