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making the REIT choice

making the REIT choice

decoding the slightly complex world of a different type of real estate investments
July 4, 2021
3 min read
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making the REIT choice

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making the REIT choice

real estate as an investment is not in the reach of all. the entry cost is too high, home loan rates fluctuate and could rise, and then there’s the maintenance cost. moreover, real estate is an illiquid asset and finding a buyer is no easy task.

real estate as an investment is not in the reach of all. the entry cost is too high, home loan rates fluctuate and could rise, and then there’s the maintenance cost. moreover, real estate is an illiquid asset and finding a buyer is no easy task.

what if there were a financial tool which allows you exposure to the growth in the real estate sector minus the risk and hassle of owning a physical property?

enter REITs

REITs or Real Estate Investment Trusts are companies that have a portfolio of income producing real estate across the property sector. like mutual funds, units of this portfolio are sold to investors which can be then traded on exchanges.

in the US, REITs were introduced as an investment vehicle in 1960 and it took a long time to gain the acceptance of retail investors but now the publicly traded REITs in the US had a collective market cap of about $1.1 trillion in 2020.

similarly, REITs are yet to catch the fancy of the mainstream investors in India. while regulations around them were notified in 2014, the first REIT in India was launched only in 2019 by Embassy Office Parks.

as per Sebi regulations, 80% of the portfolio held by REITs should be in developed and income generating properties which considerably reduces the downside risk associated with them.

REITs generate income from the rental yields and capital appreciation. Sebi has mandated that 90% of the rental income will have to be paid out as dividends.

after Embassy, Mindspace and Brookfield have also launched REITs.

in the best case scenario, where rental yield from prime commercial real estate is in the range of 7-9% and capital appreciation of the property is to the tune of 4-5%, a Reit investment can generate returns in the range of 12-14%.

while on the face of it REITs may seem like a low-risk, modest-return investment product, there is no guarantee that they’ll be able to generate a respectable rental-yield and capital appreciation. then there are interest rate risks associated with it as well. historically it has been observed that a rise in interest rate makes investors move their money from REITs to safer havens of investment.

as per the MSCI US REIT Index, the five-year return of US REITs has dropped from 15.76% in May 2020 to 7.58% in May 2021. these are on either side of the S&P 500 stock market index’s performance (~10%) over the same period. With increasing vaccine coverage and a return to pre-pandemic habits such as working out of office, there’s a good chance that REITs will start delivering again. right now may be a golden opportunity to buy the dip.