What are REITs Investing and is it the right asset class for you to invest in?
The Real Estate Investment Trust (REIT) is a unique financial vehicle that extends proportional ownership of income-generating real estate assets to individual retail investors. Traditionally, in India, investors engaged in real estate investments by directly acquiring properties or land through real estate developers and property brokers. In such investments, investors had to rely on long-term market value appreciation of the property to generate a return on investment. However, such opportunities were only viable during periods of upward trends in the real estate markets.
In order to fund their projects, developers had to secure loans from banks, private equity firms, and other sources, often leading to high-interest rates. In 2008, the Security and Exchange Board of India (SEBI) introduced draft guidelines, enabling the establishment of REITs as an asset class for investors. The primary objective was to facilitate foreign investors in accessing the Indian real estate market more easily while also providing local developers with readily available funding opportunities.
Should You Invest in Real Estate Mutual Funds?
Investing in REIT mutual funds can be considered if,
- You are seeking real estate sector exposure.
- You are looking to achieve capital appreciation.
- Wish to invest in the real estate sector but don’t want physical ownership of the properties.
- Want to diversify your investment portfolio.
Taxability of REIT Mutual Funds in India
REIT Mutual Funds’ tax implications can be bifurcated into two distinct categories: dividend tax and capital gains tax. The taxation details are as follows:
- If the Holding period is less than 3 years then tax as per slab rate
- If the holding period is more than 3 years, the applicable tax rate will be 20% after applying for the indexation benefit.
- If the income from dividends increases is greater than Rs. 5000 in a financial year, the fund house will deduct a TDS of 10% from it.
Under the Indian Trust Act, of 1882, Real Estate Investment Trusts (REITs) are established and involve various entities, including a sponsor, manager, and valuer. The introduction of REITs is expected to bring benefits to both investors and property developers alike.
What are the positives?
For the Real Estate Sector and Economy:
- It could help the real estate sector to raise stable funds
- This will encourage developers to think long-term
- Regulated by SEBI and listed on an exchange, so transparency is maintained and, therefore the chances of fraud are quite low because of this investor confidence is maintained
- Instill professionalism in property management
- Attract overseas investment
- Could help in the development of capital markets
- Assisting in generating stable and sustained long-term inflows, which are essential for financing the country’s Current Account Deficit (CAD).
For the Investors:
- Can make investing in real estate accessible to those who may not have the resources or may not want to directly buy a property
- Offers an alternative investment avenue
- Lower Liquidity risk as compared to direct property investment
- Steady Returns without trouble as REITs provide rental income in the form of dividend
Current State of REITs in India: REITs were introduced in India in 2014 by the Securities and Exchange Board of India (SEBI) to provide a regulated platform for investors to invest in income-generating real estate assets. The first REIT was listed in 2019, marking a significant milestone in the Indian real estate market. Currently, several REITs are listed on Indian stock exchanges, offering investors exposure to various commercial real estate assets across the country.
Key Considerations for Investors:
- Research and Due Diligence: Before investing in a REIT, it is essential to conduct thorough research and due diligence. Consider factors such as the quality and location of the underlying properties, the track record of the REIT sponsor, and the financial performance of the REIT.
- Risk Assessment: Assess the risks associated with investing in REITs, such as market volatility, interest rate fluctuations, and occupancy rates of the underlying properties. Understanding these risks will help investors make informed decisions.
- Tax Implications: Familiarize yourself with the tax implications of investing in REITs. REIT dividends may have different tax treatments compared to other investment vehicles, so it is advisable to consult with a tax professional for personalized advice.
REITs in India have opened up new avenues for investors to participate in the real estate market with ease and convenience. With benefits such as diversification, passive income, and liquidity, REITs offer an attractive investment option. However, like any investment, it is crucial to conduct proper research, assess risks, and consider tax implications before investing in REITs.
As the Indian real estate market continues to evolve, REITs are expected to play a pivotal role in democratizing real estate.
Kindly consult your financial advisor at Humfauji for more details on the same.