Conceptualised in the United States in the 1960s, REITs were designed to democratise real estate investment, allowing individuals to invest in large-scale, income-generating properties without the need to directly purchase or manage them. This model quickly gained traction globally, and India took its first steps toward adopting REITs in 2014 with the introduction of regulatory frameworks by the Securities and Exchange Board of India (SEBI). The allure of consistent rental income, combined with the potential for capital appreciation, has made investing in a REIT an attractive option for both institutional and retail investors. In this blog, we will explain what are REITs, how do they work and the top real estate investment trust companies in India.
Here is a curated list of the best real estate investment trust companies in India for 2024:
Note: The data in the list is from 1st October 2024. However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!Jaipur Stock
Here is a brief overview of the top REIT stocks in India:
Nexus Select Trust operates in the commercial real estate sector, managing a diverse portfolio of retail and office spaces across IndiaSurat Wealth Management. With a net profit margin of 29.86% and a cash flow margin of 60.74%, the company showcases strong financial health, indicating robust profitability and liquidity. This level of cash flow margin suggests a business model that’s efficient in converting sales into cash, a critical factor for managing operations and expansions.
Mindspace Business Parks is one of the leading commercial real estate companies in India, specialising in the development of business parks and office spaces. The company has demonstrated consistent revenue growth, with a 5-year CAGR of 7.93%, significantly higher than the industry average of 3.63%. At present, it offers an expected return of 9.38%, which outperforms its 3-year CAGR of 5.26%, making it an attractive option for investors seeking returns from commercial real estate with promising growth potential.
Embassy Office Parks is one of the prominent real estate investment trust companies in the commercial real estate sector, particularly focused on office spaces. Over the last 5 years, the company’s debt-to-equity ratio has averaged 49.15%, lower than the industry average of 63%, highlighting its prudent financial management. The company currently has an expected return of 4.77%, surpassing its 3-year CAGR of 2.47%, reflecting a modest but steady growth outlook for investors seeking lower-risk opportunities.
Brookfield India Real Estate Trust is a key player in India’s commercial real estate investment trust (REIT) sector, managing high-quality office assets across major cities. The company has experienced a volatile earnings history, with a 3-year CAGR earnings growth of -9.98%, but it now expects a significant turnaround with 1147.08% earnings growth next year. Despite its net profit margin of 1.27%, which is relatively low compared to other players, the expected earnings surge presents a major opportunity for investors betting on a strong recovery.Jaipur Wealth Management
A REIT stands for real estate investment trust. It is a type of real estate investment trust that owns and operates income-generating propertiesKanpur Investment. Real estate is a good investment option because it allows you to diversify your portfolio beyond bonds and stocks. Additionally, REIT shares are attractive due to their two characteristics:
Long-term capital appreciation
This investment option allows both big and small investors to invest their money in REITs and earn profits accordingly. Small investors might combine their funds with those of other investors to invest more in significant commercial real estate projects.
Properties included in a real estate investment trust (REIT) are:
Healthcare facilities
Housing complexes and other properties
Now that we understand what is the meaning of a REIT, let’s see why they make a potentially great investment opportunity, as well.
The following are the types of REITs in India that you can invest in.
Equity REIT is one of the most popular types of REITs. Mostly, it focuses on running and overseeing commercial buildings that produce income. Moreover, rent is a typical source of income in this area.
Mortgage REITs, commonly known as “mREITs,” are associated with lending money to proprietors and extending mortgage facilities. These REITs make money by charging interest on the money they lend to business owners.
Hybrid REITs allow investors to diversify their portfolios by investing in both equity and mortgage REITs. Here, both rent and interest are the primary sources of income for investors.
Private REITs are real estate funds or companies that are not traded on National Securities Exchange and are also not registered with the SEBI. Only institutional investors can purchase or invest in these REITs.
Real estate investment trust shares are traded on the National Securities Exchange and registered with the SEBI (Securities & Exchange Board of India). These shares can be purchased by individual investors through the NSE.
Non-traded REITs that are publicly traded are not traded on the National Stock Exchange but are registered with SEBI. These REITs are more stable because they don’t get affected by market fluctuations.
Now that you know that types of REITS in India, let us now explore how to invest in real estate investment trusts in India and how to buy a REIT unit. Real estate investment trusts are frequently traded and listed on stock exchanges. These listed REITs stock in India make attractive investments. Hence, you need a DEMAT account to invest in real estate investment trusts.
In India, you can invest in REITs India, in three ways:
1) Equity: Equity REIT stocks in India provide investors with a way to invest in the real estate market without purchasing individual properties. Additionally, REIT stocks are often considered more liquid and diversified than direct real estate investments.
2) Mutual Funds: REIT mutual funds in India are a type of mutual fund that invests in real estate investment trusts (REITs) and other real estate securities. These REITs stocks sand funds are managed by professional portfolio managers who use their expertise to select and manage a diversified portfolio of REITs shares in India and other real estate-related securities.
3) ETFs or Exchange Traded Funds: REIT ETFs are a type of investment fund that invests in a diversified portfolio of real estate investment trusts and other real estate-related securities.
Note: Each type of REIT operates differently and may have different risk profiles, potential REIT returns in India, and share prices. Hence, now that you know how to invest in REITs in India, before investing in REIT shares in India, it’s important to carefully consider your investment objectives, risk tolerance, and the specific characteristics of the real estate investment trust stocks.
REITs offer a mechanism for private investors to share in the revenue generated by commercial real estate without actually going out and purchasing the commercial real estate.
REITs provide investors with a consistent income stream by investing in properties that generate consistent rental income. This makes them less risky in comparison with other financial instruments.
The best part about REIT investing is that they provide the benefit of diversification without worrying about the ownership and maintenance of immovable properties.
Real estate investment trusts in India present distinct features that make them a noteworthy investment option.
Real Estate Exposure: REITs offer investors a way to indirectly invest in real estate without the need for direct property ownership. This allows for diversification without the challenges of property management.
Regular Income Streams: One of the defining features of REITs is their obligation to distribute a significant portion of their income as dividends. This characteristic makes them an attractive option for investors seeking consistent income.
Liquidity and Accessibility: Unlike physical real estate, REITs provide liquidity as they are traded on stock exchangesVaranasi Stock. This makes them easily accessible for investors looking to buy or sell without the complexities of property transactions.
Professional Management: REITs are managed by experienced professionals who handle property acquisition, management, and other operational aspects. This can be appealing to investors who prefer a hands-off approach to real estate investing.
The potential for significant growth in the Indian real estate sector bodes well for REIT funds in India, especially as urbanisation continues to drive demand for commercial and residential spaces. Real Estate investing can be advantageous. Let’s see how.
1) Diversification: Most of the REITs and real estate mutual funds in India are traded on the National Stock Exchange and provide investors with the opportunity to diversify their portfolios.
2) Liquidity: Since mostly, REIT investment in India is traded on stock exchanges, they provide the advantage of instant liquidity to investors.
3) Steady Cash-flow: Real estate investment trust companies offer risk-adjusted returns to investors and allow them to maintain a steady cash flow,
4) Transparency: REITs are registered with the Securities and Exchange Board of India (SEBI). Hence, they are regulated, safe, and transparent.
5) Attractive Income: Another major benefit of investing in REITs among other real estate assets is that they provide substantial REIT dividend income to investors.
Now, you can also reap benefits of investing in REITs.
Investing in Real estate investment trusts in India is suitable for those seeking exposure to real estate without the burden of property ownership. Individuals with a preference for passive income and diversification may find REIT stocks appealing. They are particularly attractive to investors looking for liquidity and flexibility in real estate investments.
Consider REIT Stocks if:
Diversification is Key: Investors aiming to diversify their portfolio beyond traditional stocks and bonds can explore REITs to add a layer of real estate diversification.
Passive Income Seekers: Those in search of regular dividends may find REIT stocks appealing, among other real estate assets, as they are required to distribute a significant portion of their income to shareholders.
Risk Tolerance Aligns: Investors comfortable with market fluctuations and real estate market dynamics may find REITs a suitable addition to their portfolio, because of their steady risk tolerance.
As awareness grows, more retail investors are looking into REIT funds in India, recognising them as a viable alternative for portfolio diversification. Investing in real estate investment trusts in India entails several notable risks that investors should carefully consider.
Tax Implications: REIT dividends typically do not qualify for lower tax rates and may face higher taxes than traditional dividends, affecting overall REIT returns.
Pass-Through Deduction Complexity: REITs qualify for a 20% pass-through deduction, but it adds tax complexity, especially for those with standard brokerage accounts.
Interest Rate Sensitivity: REIT prices are sensitive to interest rate changes, with rate hikes often causing price declines.
Property-Specific Risks: Different types of REITs in India carry unique risks; for example, Hotel REITs may underperform during economic downturns, so investors need to research specific REIT sectors carefully.
Returns from REITs are primarily derived from two key components: dividends and capital appreciation. To calculate the total return on a REIT investment, you can use the following formula:
Total Return (%) = [(Dividends Received + (Selling Price – Purchase Price)) / Purchase Price] x 100
Dividends Received: REITs are required to distribute at least 90% of their taxable income as dividends, making this a significant portion of the return.
Capital Appreciation: This is the increase in the REIT’s share price over time, calculated as the difference between the selling price and purchase price.
By adding the income from dividends and any capital gains, and then dividing by the initial purchase price, investors can calculate their overall return from a REIT investment.
Financial experts suggest that incorporating REIT funds in India into a diversified portfolio can enhance returns and provide a hedge against market volatility. However, selecting the right REIT for investment requires careful consideration of several factors to ensure it aligns with your financial goals. Here’s what to look for:
Dividend Yield: Since REITs are known for their dividends, check the dividend yield, which indicates the income return relative to the price. A consistent and high yield may suggest a reliable income stream.
Occupancy Rate and Tenant Stability: Real estate investment trust in India with high occupancy rates and stable, creditworthy tenants offer greater income stability. Look for REITs with long-term lease agreements and a diversified tenant base to reduce risks.
Management Expertise: The success of a REIT often depends on its management team. A skilled management team can strategically acquire and manage properties, ensuring sustainable growth and returns.
Debt Levels: Assess the REIT’s debt-to-equity ratio to understand its financial health. Lower debt levels typically indicate a more stable and less risky investment, especially during economic downturns or periods of rising interest rates.
Market Trends and Sector: REITs operate in different sectors such as residential, commercial, or industrial. Consider the market trends and growth potential in each sector. For instance, data center and logistics REITs may offer more growth potential in the digital age. Examining historical trends, REIT investment returns have consistently outperformed traditional asset classes.
REIT investments in India are structured to be relatively tax-efficient. Here’s a breakdown of how different types of income from REITs are taxed:
Dividends distributed by real estate investment trust companies are generally exempt from tax in the hands of the unitholders, provided the REIT has not opted for a concessional tax regime.
Interest income received from REITs is taxable at the applicable tax rates for investors. The REIT may withhold tax on this income, typically at 5% for non-residents and 10% for others.
Amortisation of SPV Debt
Any income from the amortisation of Special Purpose Vehicle (SPV) debt is exempt from tax in the hands of unitholders.
Capital Gains on the Sale of REIT Units
Short-Term Capital Gains (STCG): Gains from selling REIT units within 12 months are taxable as per short-term capital gains tax rates. These gains are taxed at 20%.
Long-Term Capital Gains (LTCG): Gains on units held for more than 12 months are taxable under long-term capital gains. If the gains are below Rs. 1.25 lakh, they are tax-free. If the gains are above Rs. 1.25 lakh, the gains will be taxed at 12.5% without any indexation benefit. The Union Budget 2024-25 reduced the holding period required for LTCG tax benefits from 36 months to 12 months, enhancing liquidity and investor interest.
Several factors influence REIT investment returns, including property location, market demand, and interest rates. Here are a few factors to consider before investing in REIT funds in India.
1) No Tax Benefit: The REIT dividends earned through the trust is subject to tax.
2) Highly Volatile: The majority of REITs investment in India is affected by market fluctuations. Therefore, risk-averse investors should analyse the investment’s return-generating capacity before investing.
3) Low Capital Appreciation: In the case of a REIT, the likelihood of capital appreciation is quite low. This is because they only reinvest 10% of their earnings and return about 90% to investors.
Real estate investment trusts in India offer a steady flow of funds to investors and provide them with the benefits of diversification. Apart from this, you don’t need a huge amount of funds to begin REIT investing. Hence, if you want to diversify your portfolio, you can start investing in REITs.
Moreover, conduct extensive research before making any investment to protect yourself against scammers, and make sure that this investment is only a small portion of your overall portfolio.
Indore Investment
