What is a REIT & How It Works?

Real estate has always been regarded as a stable investment option for wealth creation in India. However, the high entry costs and management complexities often make it inaccessible to ordinary investors. Real Estate Investment Trusts (REITs) emerge as a viable choice for such investors. They enable small investors to explore real estate investment options without having to buy actual properties. 

This article discusses what is a REIT, how it operates, its types, and other key facets.

Understanding Real Estate Investment Trust 

A REIT (Real Estate Investment Trust) is defined as an entity that owns, operates, or finances income-generating properties in a range of sectors such as commercial and residential real estate. 

Like mutual funds, REITs are a collection of funds from numerous investors that can be invested in a diversified portfolio of properties. 

• REITs provide regular income to investors through dividends, which are derived from the rental income generated by these properties.
• The Securities and Exchange Board of India (SEBI) oversees the operations of REITs in India. According to the rules, REITs are required to distribute at least 90% of their income to unitholders. 
• REITs are emerging as an attractive option for investors seeking regular income streams from real estate investments without the complexities of property ownership.

Now that you know the REIT meaning, it is time to learn about how it works.

How do REITs Work?

At its core, a REIT functions by acquiring and managing real estate properties that generate income. The business model follows these basic steps:

• Capital Collection: REITs issue units to investors to raise capital via Initial Public Offerings (IPOs) or follow-on offerings.
• Property Acquisition: They use this capital to purchase or develop income-generating real estate properties.
• Revenue Generation: These properties earn revenue primarily through rents collected from tenants.
• Income Distribution: REITs distribute no less than 90% of their net distributable cash flow amongst the investors.
• Management: Professional managers handle property operations, maintenance, leasing, and other administrative tasks.

To invest in REITs in India, you need to open a Demat account since REIT units are traded on stock exchanges. The minimum investment requirement is relatively low when compared with direct real estate investments. This makes REITs accessible to a wider range of investors.

Different Types of REITs

Here are the most popular REITs available in India for investors:

• Equity REITs

Equity REITs own and manage income-generating real estate properties. They derive their revenue primarily from rents collected from tenants. In India, most listed REITs fall into this category, focusing on office spaces and IT parks.

• Mortgage REITs

Mortgage REITs offer a source of financing for real estate by buying or creating mortgages or securities backed by mortgages. They make income from interest on these investments. While common in mature markets like the US, mortgage REITs are still developing in India.

• Hybrid REITs

Such REITs combine the approach of both equity and mortgage REITs by owning properties and providing real estate financing. They offer an opportunity to diversify in the real estate market.

Sector-Specific REITs

Some REITs specialise in particular types of real estate properties:

• Office REITs: Focus on office buildings and business parks
• Retail REITs: Invest in retail centres or shopping malls
• Residential REITs: Own and manage residential properties
• Hospitality REITs: Invest in hotels and resorts
• Healthcare REITs: Own medical facilities and hospitals

In India, office REITs dominate the market, with companies like Embassy Office Parks REIT [BOM: 542602] and Mindspace Business Parks REIT [BOM: 543217] focusing primarily on commercial office spaces and IT parks.

Pros and Cons of REITs

Before investing in REITs, it’s important to understand their advantages and disadvantages:

Final Thoughts

REITs represent an innovative way for Indian investors to access the real estate market without the traditional hassles of property ownership. They offer a blend of regular income, liquidity, and professional management that makes real estate investment more accessible. While the REIT market in India is still evolving, it presents an interesting opportunity for investors who are looking to diversify their portfolios with real estate exposure.

Ready to explore REIT investments? Torus Digital offers a comprehensive online trading platform where you can invest in REITs and other securities with ease.