What Are REITs? A Complete Beginner’s Guide to REIT Investing in India

For decades, real estate has been a preferred investment choice for many Indian families because it offers potential long-term capital appreciation and preserves the value of capital. Real estate also tends to have a positive relationship with inflation, as property values often rise along with increasing inflation.

However, buying property in India has become increasingly expensive for most investors. If you want exposure to the real estate market without physically owning properties, you can opt for Real Estate Investment Trusts (REITs).

What Are the REITs and How Does It Work?

REITs (Real Estate Investment Trusts) are companies that own, operate, and manage real estate to generate income. Through REITs, investors pool their money to invest in large-scale commercial and residential properties and lease them to earn rent. The rental income earned on the properties is the fund’s profit, which is divided between the investors, offering steady income without physically owning those properties.

A REIT is managed by a professional fund manager responsible for investing the money collected to buy or finance a portfolio of properties. As per the SEBI (Real Estate Investment Trusts) Regulations, 2014, 90% of the taxable income earned should be distributed among the investors in the form of regular dividends or other distributions.

Types of REITs

The following are the different types of REITs.

Equity REITs

Equity REITs are the most common type of REIT preferred by investors. These companies own, acquire, and manage physical real estate such as office, apartments, and malls that generate income from rent.

Mortgage REITs

Mortgage REITs are companies that invest in mortgages and mortgage-backed securities and generate revenue through interest earned on the loans. Unlike Equity REITs, Mortgage Unlike Equity REITs, Mortgage REITs do not own physical properties.

Hybrid REITs

Hybrid REITs combine the features of both Equity and Mortgage REITs, owning properties and investing in mortgage-backed securities, allowing investors to earn income from both physical properties and interest income.

Publicly Traded REITs

Publicly traded REITs are listed on the stock exchanges, such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), and can be traded easily during the trading sessions like general stocks. Publicly traded REITs are under the strict regulation of SEBI and offer full transparency to protect the interests of the investors.

Public Non-listed REITs

Public non-listed REITs are registered with SEBI but cannot be traded on the stock exchanges, reducing their liquidity.

Private REITs

Private REITs are not registered with SEBI and are usually available to only institutional and accredited investors. This type of REIT has low liquidity but offers long-term income stability.

How to Invest in REITs?

To invest in REITs, you need to have a Demat and Trading account with a SEBI-registered broker. Here’s how you can invest in REITs.

Direct Investment

You can directly purchase units of listed REITs via a trusted broker like Upstox. You need to invest in a minimum lot size to buy units of traditional REITs. You can invest in Small and Medium REITs for a minimum amount of ₹10 lakhs as per SEBI regulations.

REITs IPOs

When a new REIT is launched, you can apply for its IPO via your broker’s IPO section. You can use ASBA when applying for the units, ensuring that your funds remain blocked in your bank account and are released only if the units are allotted to you.

Mutual Funds & Exchange Traded Funds (ETFs)

If you seek a passive investment approach, you can opt for real-estate-focused mutual funds or ETFs that track listed REITs. These investments offer SIPs (Systematic Investment Plans), allowing investors to pay a fixed sum regularly instead of one significant lumpsum.

FAQs

What is a REIT and how does it work in India?

REITs (Real Estate Investment Trusts) are companies that own, operate, and manage real estate to generate income

Can beginners invest in REITs in India?

Yes, beginners can easily invest in publicly traded REITs in India through a SEBI-registered broker. You must have a Demat and Trading account to invest in listed REITs.

What are the benefits of investing in REITs?

REIT investments offer several benefits, such as high liquidity, dividend income, diversification, and an inflation hedge.

How do REITs generate income for investors?

REITs acquire properties and lease them to collect rent, which is then distributed among the shareholders, or invest in mortgage or mortgage-backed securities to offer interest income.

What are the risks of investing in REITs?

REITs carry risks such as sensitivity to changes in interest rates, limited growth potential, sector-specific risks, and offer no control over property management.