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How To Invest In REITs?
Like Stocks, REIT Units are also listed & freely traded on stock exchanges. Individuals can invest in REIT via the following methods:
A. Stocks: Individuals who want direct exposure can directly invest in listed REITs on the stock exchange.
B. Mutual Funds: Individuals who want to diversify their investment portfolio can choose this indirect method where an investor would be required to invest in any mutual fund that invests in REITs.
C. Exchange: Traded Fund: Using this particular investment option, investors would avail indirect ownership of properties as well as diversification.
How to assess the best REIT?
An investor should check the following points before investing in any REIT:
A. The sponsor/developer of the REIT trust is the single most important factor while assessing a potential investment. A trustworthy builder has a strong track record of completing projects on time. Timely completion of constructions aids rental income while delays lead to cost overruns. Check stability of rental income & management’s plans for expanding the portfolio.
B. Checking the quality of tenants is also quintessential. Well established blue-chip companies reduce the credit risk & are more likely to honour their long-term leases
C. The occupancy rates across properties must be strong. This leads to higher rental incomes and in turn higher dividends.
D. Moderate concentration risk in the form of properties or tenants should be preferred. It is ideally desirable to invest across multiple markets. Similarly, a single tenant making up a significant chunk of the income should be interpreted with a pinch of salt.
Advantages of REITs:
The following are key benefits of investing in REITs:
A. Diversification: REITs allow the investor to diversify investment portfolio through exposure to real estate in a hassle-free manner. This diversification provides investor benefits of real estate like any other asset class (Like Gold, Equity, and Debt).
B. Capital Gains: A better performing REIT will potentially increase in value over time and can be sold at a good amount of profits. This will provide capital gains to the investor.
C. Transparency in dealing: REITs are highly regulated by SEBI, which requires financial accounts to be audited by investors. This will continuously increase the transparency of the dealing and make the entire process transparent.
D. Small Initial Investment: The key problem of investing in real estate is the larger ticket size which is not possible for any small investor or retail investor. REIT provides the opportunity to invest in Real estate via it at a much lower cost than any stock.
E. Professionally Managed: REITs are professionally managed which ensures fair dealing and smooth operations.
F. Liquidity: Units of publicly listed REITs are easily purchased and sold anytime which provides liquidity to the investor.
G. Regular Income: REITs are mandatorily required to distribute 90% of their rental income to investors in form of dividends and interest payments. This will provide the investor with regular income.
Limitations of REITs
A. Fewer Options: There are only a few REITs that are listed on the stock exchange, so this is not like stocks that provide a large variety.
B. No Tax Benefits: REITs are not providing any benefit to the investors. For instance, the dividends earned and capital gain from REIT companies are subject to taxation.
C. Low growth prospects: Due to regulations, the company needs to spend 90% of their rental income as dividend distribution, which just leaves 10% to reinvest in their venture again.
D. Market Risk: Since REIT units are listed in the exchange, these are associated with market-related fluctuations. This is why investors with a weak risk appetite should weigh in the return generating capacity of this investment beforehand.
Tax on REIT Income:
There are two types of taxation rules applicable on REITs, one for dividend and another for capital gains:
A. Taxation on Dividend: As per existing rules, dividends from REITs are taxable in the hands of the investor. Dividend added as income in hands of investor and taxed according to slab rate.
B. Taxation of Capital Gain: If the investor sold units holding less than 1 year from the date of the unit received, Short term capital gain (STCG) is applicable @ 15%. Where if holding period exceeds more than 1 year, LTCG @ 10% applicable if the gain is more than 1 Lakh (including equity investments) with no indexation benefit.