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REITs is a hybrid product, which can be considered somewhere between equity and debt, as it generates a regular income via indirect rentals, helps you grow cash yields while also offering the potential for capital appreciation given the increase in value of commercial properties such as offices, retail parks, hotels, industrial buildings, etc.
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As an individual keen on accumulating wealth, there are many avenues in which you can invest, including fixed income, equity, gold, real estate, etc. While it is advisable to begin building your portfolio via debt and equity investments, real estate exposure is the next step of the process. If you are at a stage where you want to explore real estate investments, you should ask yourself an important question – given the high investment required for purchasing real estate, do you really wish to tie up a large sum of money in a comparatively illiquid asset class, for the long term? If you are purchasing real estate to build a house, then it is a different matter. However, if you are considering real estate for investment purposes, you should pivot towards Real Estate Investment Trusts (REITs), instead of purchasing actual land.
Why Should You Consider REITs?
REITs is a hybrid product, which can be considered somewhere between equity and debt, as it generates a regular income via indirect rentals, helps you grow cash yields while also offering the potential for capital appreciation given the increase in value of commercial properties such as offices, retail parks, hotels, industrial buildings, etc. It is advisable to invest in REITs, while gaining real estate exposure, because the Securities and Exchange Board of India (SEBI) mandates that REITs should distribute 90% of the rent received, to unit holders, on a half-yearly basis. Further, REITs must ensure that 80% of their assets are cash generating properties, thus mitigating development risk. Therefore, investing in REITs will offer you both, a regular income as well as exposure to a comparatively safe asset class.
REITs vs Real Estate
There are several factors which make REITs a more attractive investment avenue than real estate. Some of these include:
Transparency: REITs are listed on the exchange and can be tracked easily. Further, REITs are regulated by SEBI and offer optimal exposure to prime properties which are usually not accessible to the general public.
Periodic payouts: Another important reason to choose REITs over real estate is the periodic payouts, wherein both rent and capital appreciation are shared with investors. (10% of the Total Investment must be done in real estate under Construction properties)
No hassle of maintenance, looking for tenants: Via REIT investors get exposure to Commercial properties, Warehouses, Hotels properties and residential etc. Exposure to prime properties – which are generally out of the reach of public
Ease of investing: Generally, if you were to purchase real estate, you would need to make a significant upfront investment. You might even have to take a loan. However, the in the case of REITs, you need not invest an exorbitant amount to purchase units in a REIT – while you will have to shell out at least several lakhs to purchase real estate, you can begin investing in REITs, which are traded on the NSE, with as little as a few hundred rupees, making real estate exposure easily accessible.
Liquidity: One of the major drawbacks of investing in physical assets, especially real estate, is the inability to exit the investment in an easy and seamless manner. These investments are usually illiquid in nature and thus can be challenging to exit in an expedient manner. Since REITs are listed on the stock exchange, you can easily buy and sell units of REITs.
While REITs are becoming a highly attractive investment avenue, there are some disadvantages you should be aware of, when comparing REITs to real estate. For instance, you will not have a direct ownership of the properties and you cannot buy REITs with leverage. There is no indexation benefit and the current work from home scenario has caused lower occupancy in the office spaces, limiting the rental income. Further, as an individual investor, you would be liable to pay tax on the following types of income distributed by REITs – interest income received from a Special Purpose Vehicle, rental income from REIT assets and the dividend received from shares held in SPVs. However, unless you are keen on owning actual property and monetising the same, it is better to build exposure by investing in REITs.
So if you have been contemplating real estate investments to round out your portfolio, it is advisable to consider REITs rather than tying up your savings in real estate.
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