Should You Invest In Commercial Property Directly Or Through REITs, Here Are Pros And Cons

Investing in real estate can be a lucrative option, but it requires careful consideration of various factors. One important factor to decide is whether to invest in commercial property directly or through Real Estate Investment Trusts (REITs). Both options have their advantages and disadvantages, and understanding them can help investors make an informed choice.  

Here are the advantages and considerations of each choice

DIRECT OWNERSHIP OF COMMERCIAL PROPERTY

Assuming you acquire the asset right away, outright ownership of commercial property will provide you with complete control over all aspects related to the property.  

Bappaditya Basu, chief business officer (CBO) at Anarock Commercial, says that direct ownership allows for greater potential returns on investment as long as the property is chosen wisely. However, it requires in-depth knowledge or expert guidance from a property expert.

Direct ownership of commercial property comes with other responsibilities of property maintenance, tenant relations, and compliance with legal and regulatory requirements.  

This can be time-consuming and may require significant resources. Additionally, commercial properties are often more expensive than residential ones of comparable size, thus making them suitable for investors with higher capital pools.

INVESTING IN REITs

REITs offer an alternative way of investing in commercial real estate. These investment vehicles allow individuals to own a fraction of large-scale commercial properties.

Vivek Rathi, director of research at Knight Frank India, says REITs offer several advantages, including regulatory oversight, greater liquidity, lower investment ticket size, property diversification, and counterparty risk redressal.

One significant advantage of REITs is the liquidity and diversification they offer.  

By investing in REITs, one can spread their real estate portfolio across multiple commercial assets. REITs are traded on the stock market, and thus, provides investors with more liquidity compared to direct real estate investments. Further, the assets held by REITs are professionally managed by qualified experts, who take care of the property selection, acquisition, management, and leasing.

REITs also provides investors with a steady income stream through dividends along with the potential for capital appreciation when the value of the underlying properties rise. However, it’s important to note that REITs are subject to market fluctuations and may not always perform in line with the broader real estate market.

CHOOSING BETWEEN DIRECT INVESTMENT AND REITs

The decision between direct investment and REITs would depend on various factors, including spending power, ability to identify properties, risk tolerance, and investment goals.

For retail investors with limited capital, REITs offer benefits of constant liquidity, smaller investment options, a regulated environment, regular income flow, and access to a diversified portfolio of grade-A assets.  

Piyush Gupta, managing director, capital markets and investment services at Colliers India, says that for such investors, REITs are a more viable option.

On the other hand, investors with a higher capital pool who are seeking a personalised experience and prefer to purchase, manage, and sell properties according to their own judgment may find direct ownership of commercial property attractive.  

Direct investors can benefit from property appreciation, rental income, and profits derived from businesses associated with the property. However, it’s important to consider the illiquidity of commercial real estate, which may require significant time and effort to dispose of a property.

Says Anupam Rastogi, co-founder, and CBO-NRI Sales, Square Yards: “REITs are a convenient option for small investors who want to enter real estate with less capital and enjoy decent returns, steady income, and maintain a diverse portfolio with a lower risk quotient. REITs allow diversification of assets and the ability to generate dividend income along with capital appreciation. Since REITs are traded on the stock exchange, they are quite liquid and offer the flexibility to sell off the investment in case an investor wants to do so.”

Rastogi adds: “However, REITs are new in the market and their trading on stock exchanges makes them vulnerable to value fluctuations and market dynamics. Further, REITs do not enjoy tax advantages, as income generated or even divided payments from REITs are taxed.”

Direct investments in commercial property would seem attractive to investors operating with a higher capital pool who prefer a more individualised experience and want to purchase, manage, and sell the property as they deem worthy. Direct commercial investors would also profit from property appreciation, rental income, and also profits arising out of the business that depends on the property. Besides, rental yields may be as high as 6-7 per cent, though monthly rent may increase or decrease according to market conditions. Further, the substantial cash flow is higher in commercial investments.  

However, commercial real estate is illiquid, and disposing of a property may take months or even years. So, for both investments, one must analyse their financial situation and investment goals before making a move.

REITs, on the other hand, offer liquidity, diversification, and professional management, but their performance is subject to market fluctuations. 

Ultimately, investors should carefully evaluate their financial situation, investment goals, and risk tolerance before deciding between direct investment and REITs. Seeking guidance from financial advisors or property experts can also provide valuable insights into making the right choice.

Both direct investment in commercial property and investing through REITs offer unique advantages and considerations. Direct ownership provides control and potentially higher returns, but it requires extensive knowledge and resources. Understanding your own financial circumstances and investment objectives will help determine which option is better suited for you.