Saturday, September 6, 2014

What are REITs?

What are REITs?

"REITs is an investment trust that owns and manages a 

pool of commercial properties and mortgages and other 

real estate assets; shares can be bought and sold in the stock 


REITs - Real Estate Investment Trusts - have been in the 

news lately ever since SEBI issued guidelines for REITs to 

come in to existence within the regulatory framework. 

Investors, both wholesale and retail, now will have another 

avenue to invest in the real estate sector through a regulated

fund route.REITs will help investors channelize their investments into India's realty sector through a regulated mechanism. As the investment in REITs is asset-backed, it is helpful for investors to invest in real estate without the hassle of going through the checks on property titles and the plethora of regulatory formalities.

Investopedia defines REITs as a security that sells like a 

stock on the major exchanges and invests in real estate 

directly, either through properties or mortgages. REITs 

typically offer investors high yields, as well as a highly 

liquid method of investing in real estate."

Types of REITS

There are internationally three types of REITS. In India 

however, a beginning is made with the third type, the 

hybrid one.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans.

Hybrid REITs: Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages. REITS in India will be predominantly of the Hybrid type.

Individuals can invest in REITs by purchasing their shares 

directly on an open exchange. An additional benefit to 

investing in REITs is the fact that many are accompanied 

by dividend reinvestment plans (DRIPs). These are 

equivalent to Growth plans in Equity and other mutual 

Funds. Besides, REITs invest in shopping malls, office 

buildings, apartments, warehouses and hotels. There are 

specific segment or location wise investments too. Some 

REITs will invest specifically in one area of real estate - 

shopping malls, for example - or in one specific region, state 

or country. Investing in REITs is a liquid, dividend-paying 

means of participating in the real estate market.

 Benefits and risks of REITs?
 REITs will offer investors another option or avenue to include real estate in their investment portfolio. Further, well managed REITs may offer higher dividend yields which may be higher compared to other investments. As we know, rental yields on long term commercial office space and retail space tend to be much higher than rental yields on residential property, higher than dividend yields on stocks and are often in the range of returns that bank deposits offer. An investor in a REIT can thus look forward to reasonably high annual dividends as well as some appreciation in the long term from appreciation in the capital value of the properties owned by the REIT.

There are several risks in non-traded REITs including 

liquidity and non-transparency - which is perhaps why 

SEBI has not permitted non-traded REITs to be introduced 

in India.
Neeta Shah
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