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
'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. India
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
however, a beginning is made with the third type, the
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
will be predominantly of the Hybrid type. India
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