The financial market is expanding with the growth of new investment instruments, and one such investment option is REIT. A Real Estate Investment Trust (REIT) is a company that owns or operates real estate that earns rental income.In simple terms, the company generates revenue by leasing or renting real estate properties. The income is then paid out to investors and share holders as dividends.REITs invest in property types such as retail centres, infrastructure, cell towers, warehouses, apartment buildings, hotels, retail centers, shopping complexes and malls.
In a REIT scheme, investors invest in units of real estate portfolio held by the REIT. Investment in REIT can give reliable and impressive returns with the advantage of long-term capital appreciation.
Types of REIT
There are 6 types of REITs:
•Equity REIT–This is the most preferred type of REIT. Equity REIT deals with revenue generating commercial real estate assets. Income from equity REIT is as rent.
•Mortgage REIT (mREIT)-This type of REIT provides mortgages and financing proprietors. mREIT also purchases mortgage-backed securities, and they earn the interest accrued on these investments.
•Public listed REIT- As the name suggests, this type of REIT has its stock listed on the stock market. Prospective investors can trade these shares in stock exchanges.
•Public non-listed REIT- This type of REIT is registered with the Securities and Exchange Board of India (SEBI) but are not listed in the stock market.
•Private REIT- Private REIT works similar to private placement. This type of REIT is neither registered with SEBI nor traded on thestock exchanges. They sell the shares to a predetermined select pool of individuals and entities.
•Hybrid REIT- Hybrid REIT diversifies the investment into equity REIT and mortgage REIT. Hence, investors get the dual advantage of income as rent from equity REIT and interest from mREIT.
Requisites for a company to qualify as a REIT
A company needs to fulfill the following conditions be become a REIT:
•The entity must be a trust or corporation.
•It must be managed by trustees or a board of directors.
•It requires minimum of 100 shareholders.
•90% of the income generated must be given out to investors in returns.
•A minimum of 75%of investment needs to be made in real estate.
REITs & Mutual Funds
REIT function akin to mutual funds. In mutual funds, the company pools capital from investors to purchase market securities. Similarly, REITs collect money from investors that enables them to invest in a unit portfolio of real estate without owning any property.
In 2017, the capital market regulator SEBI allowed mutual fund houses to invest up to 10% of their fund’s assets in REITs.
However, investments in REIT requires a substantial investment corpus. As a result, institutional investors and Ultra High Net Worth Individuals (HNIs) invest in REIT.
However, the space is slowly opening up to the retail and individual investors as well. Recently, Kotak Mahindra Mutual Fund launched Kotak International REIT Fund of Funds making it India’s first diversified REIT mutual fund. The fund will invest in SMAM Asia REIT Sub Trust Fund that has investments in various real-estate projects, including residential, office, data centres, warehousing, retail, etc. The fund is one of the largest REITs operating in the Asia-Pacific region.
So, investors of the fund will indirectly gain exposure to real estate units and benefit from the growth in the real estate market without actually owning the entire asset.
Investors who want to invest in other investment options to diversify their portfolio can look at investing in this REIT fund. You can talk to us to know more about the fund.
This blog is purely for educational purpose and not to be treated as an personal advice. Mutual fund investments are subject to market risks, Read all scheme related documents carefully.