Are REITs in India a Smart Alternative to Real Estate?
REITs are changing the investing environment in India, becoming a top new investment trend for those seeking steady returns and diversification. As the real estate market expands, REITs provide a new investment idea driven by commercial growth and rising demand for high-value properties.
What Are REITs?
REITs full form is Real Estate Investment Trusts. These companies own, operate, or finance income-generating properties. They allow individuals to invest in large-scale real estate by pooling funds to manage assets like malls, offices, and hotels—allowing investors to earn returns without owning property directly.
With SEBI’s regulations ensuring transparency and trust, more investors are exploring REITs to capitalize on India’s booming property sector. This trend signals new opportunities for long-term wealth creation.
How REITs Work
REITs (Real Estate Investment Trusts) function similarly to mutual funds, as both are investment vehicles that pool money from multiple investors. While mutual funds invest in various assets like stocks, debt instruments, and gold, REITs specifically focus on real estate, purchasing and managing income-generating properties such as offices, malls, and hotels. The rental income collected from these properties is then distributed to investors as dividends.
To ensure investor protection and regular income distribution, SEBI regulations require REIT investments to distribute 90% of their earnings to investors, making them an attractive option for those seeking steady income from real estate investments without directly owning properties.
Types of REITs in India
Real estate investment in india are classified based on the type of assets they invest in. Here are the main types:
1. Equity REITs
These REITs acquire and manage physical commercial properties. It focuses primarily on premium office buildings, shopping centers, and hotels. They generate income through collecting rent from tenants who lease these spaces. Equity REITs grow your investment in two ways: through regular rental payments from tenants, and from properties becoming more valuable over time. For example, a REIT owning offices in Mumbai earns both monthly rent and gains from rising property prices.
2. Mortgage REITs (mREITs)
Instead of owning physical properties, these REITs provide financing to real estate projects or purchase existing mortgages. They earn money by collecting interest on these loans, similar to how a bank operates. They often offer higher dividend yields compared to Equity REITs. However, they involve additional risk as their performance heavily depends on interest rate fluctuations and the borrowers’ ability to repay loans.
3. Hybrid REITs
These investment vehicles combine the strategies of both Equity and Mortgage REITs. They maintain a portfolio of physical properties while also investing in real estate loans. This structure gives investors exposure to both rental income and interest payments. It can provide more stable returns across different market conditions.
The Differences Between REITs and InvITs
Here’s a table comparing REITs and InvITs in India, highlighting the key differences to help investors make informed decisions based on their financial goals.
| Aspect | REITs | InvITs |
|---|---|---|
| Definition | Investment trusts focused on income-generating real estate assets. | Investment trusts focused on income-generating infrastructure assets. |
| Primary Focus | Commercial real estate includes office buildings, malls, and hotels. | Infrastructure projects such as roads, highways, power transmission lines, and renewable energy. |
| Revenue Source | Rent from leased properties and capital appreciation. | Toll collections, power transmission charges, or other income from infrastructure assets. |
| Risk | Relatively lower risk due to stable rental income. | Slightly higher risk due to dependency on operational efficiency and economic factors. |
| Liquidity | Listed on stock exchanges, providing high liquidity. | Listed on stock exchanges but may have slightly lower liquidity compared to REITs. |
| Tax Implications | Dividend income is taxable in the hands of investors. | Similar tax treatment as REITs; depends on the structure and income source. |
| Suitable For | Ideal for investors looking for stable income and real estate exposure. | Suitable for investors seeking returns from infrastructure development projects. |
Taxation on REITs in India
If a REIT pays you dividends, you might have to pay tax on them. This happens if the company managing the properties (called the Special Purpose Vehicle or SPV) chooses a lower tax rate under Section 115BAA. If not, the dividends are tax-free. Interest income is fully taxable at the investor’s slab rate. Capital gains are taxed at 15% for short-term (if units are sold within 36 months) and 10% for long-term (beyond 36 months) on gains exceeding ₹1 lakh. Any return of capital lowers the amount you paid for the REIT units. You’ll pay tax on this amount when you sell the units. Staying updated with SEBI guidelines and tax regulations is essential for accurate financial planning.
How to Invest in REITs in India
Investing in REITs in India is straightforward and accessible to most investors. Here’s a step-by-step guide:
1. Choose the Type of REIT
Decide between publicly traded REITs listed on stock exchanges, non-traded public REITs, or private REITs. Publicly traded REITs are the easiest to access and offer liquidity.
2. Open a Demat and Trading Account
To invest in publicly traded REITs, you need a Demat and trading account with a registered broker. This account allows you to buy and hold REIT units.
3. Select a REIT
Research and shortlist REITs based on factors like property portfolio, dividend yields, and market performance. Look for diversified REITs with consistent returns and high occupancy rates.
4. Place an Order
Buy REIT units through stock exchanges (NSE/BSE) during trading hours, similar to purchasing shares. You can choose between a lump-sum investment or a systematic investment plan (SIP).
5. Monitor Performance
Track your investment regularly by reviewing dividend payouts, net asset values (NAV), and market performance. Consider reinvesting dividends to maximize returns.
6. Participate in IPOs
New REITs are often launched through IPOs. Participating in REIT IPOs can provide early access to high-growth opportunities. IPO applications can be submitted via your broker.
Advantages and Disadvantages of REITs
This comparison highlights the balance between potential rewards and associated risks, helping investors make informed decisions.
Advantages
- REITs offer liquidity as they can be easily bought and sold on stock exchanges.
- REITs provide regular income through dividend payouts.
- Investors gain real estate exposure and diversification with minimal capital investment.
- Professional management ensures effective handling of property acquisitions, leasing, and maintenance.
Disadvantages
- REIT prices fluctuate with market volatility, reflecting broader economic trends and investor sentiment.
- Rising interest rates can reduce REIT returns by increasing borrowing costs and lowering property values.
- Declines in property values can negatively impact overall returns and asset valuations.
- Dividend and interest income from REITs are taxable, potentially affecting net returns.
Conclusion
REITs in India provide a simple way to be involved in property investment without directly owning real estate. These trusts generate income from assets like offices and malls, offering steady returns and transparency under SEBI regulations.
With various types, including Equity REITs, Mortgage REITs, and InvITs, investors can make selections aligned with their financial objectives. REITs offer regular dividends and diversification but come with risks like market volatility and interest rate impacts. Investing is easy through stock exchanges or IPOs, making REITs a promising option for long-term wealth creation.
If you want to find more investment opportunities, visit our Expert Insight section for advanced analysis, market forecasts, strategic tips, and lessons that you can learn from financial leaders and media to make more informed investment decisions.
FAQs
REITs (Real Estate Investment Trusts) are investment vehicles that pool funds from investors to invest in income-generating real estate properties. They allow investors to earn dividends from real estate investments without owning physical property.
Yes, REITs in India are regulated by the Securities and Exchange Board of India (SEBI) to ensure transparency, accountability, and investor protection.
The major REITs listed in India are Embassy Office Parks REIT, the country’s first publicly listed REIT, which focuses on commercial office spaces; Mindspace Business Parks REIT, known for its office parks and IT hubs across major cities; and Brookfield India Real Estate Trust, which primarily invests in large office assets and expanded its portfolio by acquiring a 50% stake in Bharti Enterprises’ assets in 2024.
No, most REITs in India distribute quarterly or semi-annually, not monthly dividends. The frequency depends on the income generated from their properties and the REIT’s policy. Although some global REITs pay dividends monthly, this is uncommon in India due to market structure and tenant leasing models.
It is recommended to hold REITs for at least 3 to 5 years to benefit from rental income, capital appreciation, and overall market stability. However, a recent update in Budget 2024 reduced the holding period required for REITs to qualify as long-term assets from 36 months to 12 months. This change enhances liquidity and tax benefits for investors. Despite this, long-term holding still offers more consistent returns and portfolio growth.