What Are Real Estate Investment Trusts (REITs)? Benefits And Challenges

Reits have become one of the tools for retail investors to have a small stake in office spaces. Office space transactions grew by 25 per cent year-on-year in the March quarter to 10.8 million square feet, according to a recent report by Knight Frank, a real estate consultancy firm.

What Are Reits?

Reits refer to companies that operate, own or finance income-producing real estate properties. Reits are modelled on the lines of mutual funds, wherein you can invest in a part of real estate rather than the entire property, which may be unaffordable for retail investors.

Reits are linked to completed, rent-yielding commercial assets. The market is, therefore, giving them a thumbs up. “The three current Reits comprise good portfolios with high-quality Grade A office spaces, and most corporates did not give up their rented office spaces even amid WFH (work from home). Reits in India involve global players that strictly adhere to global standards and practices in managing assets. Grade A office spaces with state-of-art facilities help them command good rentals, at times even higher than other properties in the vicinity,” says Anuj Puri, chairman, Anarock Group, a real estate services company.

There are primarily two kinds of Reits—equity Reits and mortgage Reits. Equity Reits include properties such as condominiums, offices, hotels, shopping centres, and draw most of their revenues through rent from these properties. Mortgage Reits, on the other hand, finance properties that may be residential or commercial. They earn income from investment in mortgage-backed securities.

They were first introduced in the US in the 1960s, through the Cigar Excise Tax Extension Act, and the first Reit was listed on the New York Stock Exchange in 1965. In India, Sebi came out with revised regulations for Reits in 2013 that were approved in 2014.

Benefits Of Reits

Reits promise to offer a regular stream of income through dividends.

“Reits are mandated to distribute at least 90 per cent of their profit as dividends to investors which is also tax-free. These instruments are relatively less volatile than other asset classes such as the stock markets because regulations maintain that 80 per cent of the Reits listings should be of rent-generating (operational) assets. Despite the pandemic, the performance of Reits has been positive, with their rental collections being at 98-99 per cent,” says Kapoor.

The Challenges

Some challenges remain. These include limited knowledge of the new product and lack of robust evidence on the returns.

Since Reits are listed on the NSE and BSE, trends in the equity markets will influence the return expectations of retail investors.