REITs or Real Estate Investment Trusts are a category of investment which allows investors to invest in otherwise high valued Real estate and receive consistent income in the form of dividends. Finance Minister Nirmala Sitharaman in her budget speech on 1st Feb 2021 announced that the dividend on REITs is exempted from TDS in order to encourage the investment from investors. This has brought the REITs investment to the spotlight. And for the information, REITs are new in Indian investment forum but they are already popular among Other markets like the USA.
USA has launched the first REIT in 1961 and since then many markets have introduced REITs.
In India at present(as of Feb 14th 2021) there are Three REITs these are
Keep an eye on the upcoming IPOs to find any new REITs issues that are available from time to time.
Real Estate Trust Companies are the organizations that invest the funds in Real estate properties which give continuous rent. There manage the high-value Real Estate Properties and distribute the income which is received in the form of rents to the investors as Dividend payments.
Owning Real Estate properties involve huge risks and also a tiresome work that needs to be taken care of continuously. For example, buying a property to rent involves going through all the legal work and also continuous maintenance which also needs to be done when you are renting it. And in addition to all these, you have to invest a very large amount of time which most of the times has to be financed by taking loans from banks. Hence you need to take care of the burden to get loan approval and also interest payments.
But REITs are better opportunities to own the real estate properties and receive continuous income as dividends which will be paid by the REIT company as they collect the rent and others from the properties they manage. This way the investors can design the portfolio and appreciate the capital with continuous dividends. (Dividends depends on the rent if any that will be collected)
For Retail Investors In India, the minimum amount that they can invest in REIT IPO is ₹50,000 whereas for other IPO’s the minimum amount is little less than around ₹15,000
In India, the stock market regulator Securities Exchange Board of India(SEBI) has kept a lot of rules and regulations for the REITs companies. These are in order to provide a safe and growth investing community. The following tells us about the conditions that a company has to qualify and follow
How Does a Company Qualify as a REIT?
To qualify as a REIT, a company has to meet specific requirements as mentioned below.
- The entity needs to be structured as a business trust or a corporation.
- Extends fully transferable shares.
- Is managed by a team of trustees or a board of directors.
- Must have a minimum of 100 shareholders.
- Less than 5 individuals should not have held 50% of its share during each taxable year.
- Is required to pay at least 90% of the taxable income as a dividend.
- Accrue a minimum of 75% of gross income from mortgage interest or rents.
- A maximum of 20% of the corporation’s assets comprises stock under taxable REIT subsidiaries.
- A minimum of 75% of investment assets must be in real estate.
- A minimum of 95% of REITs total income should be invested.
Advantages of Investing in Real Estate Investment Trusts
The advantages of Investing In REITs are
- No TDS On Dividends as announced by FM Nirmala Sitaraman In a budget speech on 2nd FEB 2021. (This might change every year, Please check)
- Steady dividend income and capital appreciation
- Option to diversify
- Investing in small quantities in High-value Real Estate Properties.
- Liquidity while investing in Real Estate sector which outside real estate ownership is not that liquid.
- Risk-adjusted Returns
Disadvantages of Investing in REITs
- Low Growth Prospects
- Market Fluctuations
- Organizations Business management fees will be deducted from the Rent Income
Different Types of REITs
There are different types of REITs. They are as below
- Equity
- Mortgage
- Hybrid
- Private
- Public Traded REITs
- Public Non Traded REITs
