REITS- AN EXCITING NEW ASSET CLASS
The love of India population towards traditional investment options like Gold and Real estate is well documented. These assets have given better returns and since both gold and land are scarce natural resources, their prices don’t fall as we can observe in newer asset classes like cryptocurrencies, vouching for the safety of these investments. Further, Indians have an emotional propensity to these asset classes. The Vigor in which Indians invest in gold and real estates have consistently defied the approach of investors throughout the world. There are many households in India where majority or all of their investments are either in gold and real estate, unmindful of an academic’s knowledge on concepts like diversification and hedging.
The problems with investing in real estate:
Many people invest in real estate with the aim of constructing their homes and settling down. But they fail to realize the many opportunities these investments offer. Real estate investments are not liquid, value appreciation depends on location and government policies.
Rental income generated varies depending on the purpose. Commercial establishments commend a higher interest than residential areas. Above all, prices of real estates have sky rocketed in the recent years, that the poor or middle class people are no longer able to invest in income generating real estates.
Real estate investment trusts are companies which own, operate and manage a portfolio of real estate like commercial buildings and office spaces. These trusts list units in exchanges and are available for public to invest in. These companies profit mainly from rental income and capital appreciation.
Good thing about these REITs is a large commercial space can be bought as a small unit.
- Since these units are traded on exchanges, there is no worry about liquidity.
- The usual hazzle of transfer of ownership and registration is not there while investing in REITS, saving considerable time and money.
As of now, Three REITs are available in India for investments. Namely, Brookfield REIT, Embassy REIT and Mindspace Business parks REIT.
These are managed by professionals. Further, by regulatory norms, REITs are required to distribute 90% its profits as dividends to its shareholders.
These factors make REITs and attractive investment opportunities.
Recent SEBI rules on investing in REITs:
Earlier, It was required that you invest a minimum of Rs. 50,000 in REIT and atleast 200 units were required to be bought, keeping it out of reach of small time investors.
As per recent modification of SEBI order, minimum investment has been reduced to Rs. 10,000 – 15,000 and investing can be done in as low as one unit.
With these exemptions, it is possible that these assets become attractive, paving way for more such offerings, thereby making these assets more liquid.
Things to consider before investing Investing in REITs:
Though it is a liquid form of real estate investment, the sector is slow growing. It may not show quick capital appreciation like IT or other growth oriented sectors.
This sector is more sensitive to interest rates and other policies of governments.
May rely heavily on Debt;
Real estate is a cyclic business, so yields may not be uniform.