REIT- Real Estate Investment Trust
Real Estate Investment Trust, REIT is an addition of recent origin to an investment portfolio. Real estate as an investment class has always been attracting both small and big investors. Investment in commercial reality is highly capital intensive and this asset class was affordable only for the affluent. Real Estate Investment Trust has evolved as an attractive investment option for investment in commercial real estate for all classes of investors.
What is a Real Estate Investment Trust – REIT?
A REIT is an investment option that follows the model of a mutual fund. A Real Estate Investment Trust is basically a company that owns, operates or finances income-producing real estate. Thus, REITs allow investors to own a share in valuable real estate and enjoy the benefits thereof. Thus, REIT resembles a mutual fund like scheme that invests in the asset class of real estate instead of stocks.
The instrument, allows anyone to invest in portfolios of real estate assets the same way they invest in mutual funds or stocks or exchange traded fund (ETF). The fund is professionally managed and listed in stock exchanges. The holders of a REIT earn a share of the income produced through real estate investment – without the hassles associated with real estate investment like going out, identifying quality asset, managing and financing the property. All these activities are carried out by the Real Estate Investment Trust at a nominal charge which is normally charged to the return from the scheme.
Advantages of investments through Real Estate Investment Trust (REIT)
REIT presents an opportunity to all investors to own valuable real estate even with minimum investment and enjoy dividend-based income and total returns. The advantages associated with this investment class are:
Low investment amount- REIT is an investment option with minimal risk and steady income. The minimum investment prescribed for a REIT is rupees two lakhs only. This makes REIT an affordable investment for different classes of investors.
Reasonable return- The projected return in REIT is 8-14% in the short to medium term. It is stipulated that minimum 80 % of investments by REITs should be in rent generating commercial assets.
Less volatility- Stock market and mutual funds remain as most favored investment options for investors because of the attractive returns. However, said investments are subjected to high volatility and market corrections. Value of gold also undergoes changes depending on economic conditions. REIT remains less volatile as rent generation is a relatively stable process. Further, REITs are chasing the limited supply of good quality office spaces in limited centres. Rentals in good markets have been showing steady increase regardless of supply increase or decrease.
Income distribution- Guidelines on REITs stipulate that minimum 90% of the net distributable income after tax shall be distributed to investors at least twice a year. REITs in countries like Canada, Singapore, UK, Australia etc offers lucrative investment options like dynamic and flexible REITs.
Disadvantages of investments through Real Estate Investment Trusts (REIT)
Success of REITs will be based on the benefits or return they will be able to provide to investors. As per the prevailing rules, the income generated by REITs is subject to many taxes. For example, when REITs sell their shares of assets, the income attracts capital gains tax. The return may thus make the investment option unattractive for many.
