Real Estate Investment Through Mutual Funds
Apart from investing in the equities of real estate companies, there are mutual funds available too. Real Estate mutual funds are thematic funds or sector funds that invest into securities of real estate companies and infrastructure companies. They invest in equities, debt securities of real estate companies as well as units of REITs / InVITs.
Returns on real estate mutual funds/equities primarily depend on real estate prices that are cyclical in nature.
What is a Real Estate Investment Trust (REIT)?
REITs are a hybrid investment class, demonstrating characteristics of both equity & debt.
The concept of REITs originated in the United States when President Eisenhower signed the REIT Act into law in 1960. The US Congress accepted the bill with a view to provide US investors with the opportunity to invest & profit from diversified, large-scale professionally managed portfolios of US Real Estate.
REITs are similar to mutual fund units that allow investors to pool funds for investment in a diversified portfolio of high-value real estate properties and mortgages. REITs own a portfolio of income-generating properties such as highways, commercial buildings, office parks, etc.
The rent thus collected is later distributed among shareholders as income and dividends. REITs are required to distribute at least 90% of their net taxable income to unitholders in the form of dividends, hence providing a steady stream of assured income. REITs are highly liquid & its units are freely traded on the exchange.
Illustrated in the below graph are capitalization rates for the Indian Markets (yield of REIT). They appear to be attractive compared to other geographies.
How Does REIT Generate a return?
A. Capital Gains: The price of listed REITs in the market fluctuates depending on the health of the Real Estate market coupled with demand-supply dynamics. A booming real estate market drives up the prices of REITs and hence provides capital gains to investors.
B. Dividend: Dividends are paid out by REITs from the rental income received by REIT. This refers to income that REIT receives by renting out and leasing properties held by REIT after deducting operating expenses such as depreciation, maintenance charges, management fees, etc.
C. Loan to subsidiaries: REITs can generate interest income from the loans given out to its subsidiaries.