A Complete Guide on REITs, its type and taxation policies in India
REITs or Real Estate Investment Trust is the company that owns and manages the real estate operations for the income. Real Estate Investment Trust Companies are the corporations that manage the portfolio of high-value real estate properties and mortgages.
For instance, they lease properties and collect the rent thereon. The rent collected is further distributed to the shareholders as dividends and income.
In simple language, Real Estate Investment Trust offer you the opportunity to possess the high-priced real estate and enable them to earn the dividend income to boost their capital eventually.
Therefore, the investors can utilize the opportunity to appreciate the capital and generate income simultaneously.
Both big and small investors have the investment opportunities to reap the benefits accordingly. Small investors can attempt to pool their resources along with other investors and invest them into large commercial real estate projects.
Real Estate Investment Trust include the properties that comprise the data centers, infrastructures, healthcare units, apartment complexes, etc. While building your portfolio, real estate is considered the key element with equity and fixed-income portfolios.
Understanding Real Estate Investment Trust (REITs)
When the economy booms and the Government lays the greater impetus on the infrastructural development that includes real estate. The real estate trust holds the major portion of the significant investors for gaining exposure and profit by making the right investment.
Here at Real Estate Investment Trust is the entity that creates the purpose of channelizing the funds and could be operational and functional.
Therefore, we can say that it is somehow the same as a Mutual Fund and offers you an easy way to invest in real estate. But, in addition, it provides you the greater opportunities of investing in the real estate sector.
What does History reveal About the REITS?
As structured on the lines of mutual funds, Real Estate Investment Trust firstly got their place in the United States of America in the late 1960s through Cigar Excise Tax Extension Act for boosting the real estate sector. It presented the opportunity to reap huge dividends on the investments made, and they seemed quite rewarding.
When was it introduced in India?
In India, REITs were introduced by SEBI in 2007, and the Real Estate Investment Trust regulations are framed for facilitating the operational functions of these investment funds, which were further revised and reformed. REIT companies listed ensure adherence to industry practice and safeguard the interest of the investors.
Eligibility of REITs
The eligibility of the Real Estate Investment Trust are as follows:
- 90% of the income must be distributed to the investors as a dividend.
- Properties capable of regenerating revenues have 80% of the investment amount.
- 10% of the total income must ade in real estate for the properties under construction.
- The company must have an asset base of at least Rs 500 crores.
- Updating the NAVs twice in every financial year.
Types of REITs in India
As an investor, you might think for the better yield of the investment in real estate and fixed income, the traditional asset class for this purpose. However, a truly constructed portfolio should consider both of them.
- Retail REITs
The type of Real Estate Investment Trust invests mostly in shopping malls, grocery stores, supermarkets, etc. However, the REITs are not directly involved in running the outlets of that particular investment; the purpose is to rent out the property for the retail tenants. Therefore, returns depend on the retail sectors; you know about the investment if the retail sector booms. Right?
- Residential REITs
These are the type of Real Estate Investment Trust that own the operating housing facilities, for instance, apartments, buildings, and gated communities. Considering the demand for residential property in India, this could be the best possible sector to go with.
- Healthcare REITs
Like the Retail REITs, these are the properties for the hospitals, medical centers, clinics, etc. Demand for healthcare is rising every day, so it represents the opportunity and bigger investment.
- Mortgages REITs
These REITs lend the money to the real estate buyer or acquire existing mortgages. The name of mREITs. Most income is derived from the interest they get on the mortgages. So the risk is higher as compared to the others.
- Equity REITs
The REITs invest in offices, residential complexes, industrial estates, hotels, etc. They acquire, manage, build, sell real estate, and distribute most of the income earned by the investors as a dividend.
Basic Investment Parameters Before Investing in REITs
A complete analysis and mini-guide for you to help you out with the basic parameters before investing in REITs.
- Occupancy: This is the ratio of rented or used space for the total amount of the available space
- Asset Portfolio: As an investor, you must also look for the clientele of the REIT and the special purpose vehicle. Look for the company or the limited liability partnership which either a REIT holder or proposes to hold an equity stake or interest of at least 50%.
- Geographical Diversification: The IT sector holds the major position of the premium, high-quality grade spaces. However, over-dependence on a single sector, especially the IT sector, may risk the newer trends and options.
- Re-leasing Spread and Rolling Renewals: Re-leasing spreads refer to the different rent changes per square foot. It happens between the new one and the expiring one. It signifies the ability of the REIT to execute the new leases with the increased rentals for the same property.
Investment in Listed Units of REITs?
REITs are listed and traded on the stock market under the guidelines of SEBI, of course, just like the equity share, etc. It becomes compulsory for the investment to have a Demat account for investing in REITs in India.
- Earlier, there was a minimum requirement of Rs 50000 for the investor to invest. However, vide notification issued by the SEBI on July 30, 2021, the same has been dispensed away for investing directly from the stock exchange. The minimum investment criteria are INR 10000-15000.
- Another thing is the lot size of the REITs traded, which was a lot of 100 units. By the SEBI notifications, the lot size has been reduced to 1 unit.
- Currently, 3 REITs allow investors to invest in India, i.e., Embassy Business Park REIT, Mindspace Business Parks REIT, Brookfield India REIT.
What Kind of Risk is Involved?
Limited Options: Currently, you will find the three listed REITs in India. So, for investors, the choices are limited compared to other countries.
Property Vacancy: One of the biggest risks REITs face is a vacancy. The pandemic has further aggravated the issue, and it is widely spread with the adoption of work from home, especially in the IT Sector.
Growth Prospectus is Low: REITs are mandated to distribute at least 90% of Their Income to the investors. Therefore, it stifles their ability to plow back the money into the REIT business for higher growth.
Taxation on Investors for Investing in REITs
Income received from the REITs in the nature dividend, rent, interest should be distributed. So, here is the taxation system of the REITS:
| Type of Income | Taxability |
| If SPV has opted for a concessional tax rate at 22% under Section 115BAA, which provides the certain domestic companies to pay the rate of 22% rather than paying 25% or 30% which is the regular tax rate subject to certain conditions. | Taxable at normal rate |
| If SPA not opted for taxation under 115BAA | Dividend income is exempt in the hands of investors |
| LTCG held for more than 36 months | LTCG only exceeding INR 1Lakh, taxable at 10% |
| STCG held for 36 months | Taxable at 15% |
| Capital Gains, arising out of the sold units in SPV or sale of property directly by REITs | Exempt for the investors |
| Investment by REITs mortgage-backed securities or debt securities for the eligible companies in India. | Exempt for the investors |
| Rental Income from the property that is owned directly. | Taxable at normal tax rates, as applicable for the investors |
Expected Rate of Return From Investment in REITs
Commercial Real Estate usually provides returns between 8% to 10% p.a. However, grade A office spaces and commercial spaces at prime locations have many potentials for providing excellent returns. The expectations from REITs for the return on investment is 8% to14% in short to medium term with minimal risk.
Keeping in mind the pandemic session, some companies offered a bit higher returns.
Final Verdict
India has few restrictions on Overseas investment in real estate and the concept of REIT at a nascent stage; the Indian real estate market has the potential for aligning the Indian REITs in line with their foreign counterparts, with everyone who desires to have a good portfolio must go with the REITs.
