Maximizing Real Estate Returns: Why REITs in India are the Ultimate Investment Solution
In this article, we will explain the benefits of investing in REITs and how REITs in India can be a game changer for Indian Investors.
Have you ever thought of buying a house just for rentals? Real estate as a form of investment is quite a popular choice for many investors. It allows them to collect regular rentals and boost their cash flow.
Having a house under your name also is more of a security. Everyone likes to have a roof over their heads, and when anyone finds themselves with such an option, they do not shy away from the opportunity.
No doubt, it has led to the skyrocketing of prices in real estate, especially in India.
Everyone is buying up new houses and creating an imbalance in the fundamental laws of economics.
When the demand is much more than the supply, the prices will go up. But what many investors fail to understand is the effect it causes on the ROI of a particular estate.
The Dwindling ROI
The ROI, or the Return on Investment in Indian real estate, has been declining over the years.
The rental cost is not increasing as quickly as the prices of the houses.
For example, a 35lacs worth of flat in any good locality pay a rental of about 1.2lacs a year.
If you calculate the ROI, it is around 3.4%. This percentage does not even constitute the maintenance, time spent to find new tenants, and the hassle of late rent payments by some people.
Even if you ignore all these, you can invest the same amount in any Fixed Deposit or T-bill and still earn much better than that.
Although there is an angle of capital appreciation, it takes a long time, and you are not always guaranteed high prices.
The alternative to all such hassle is the Real Estate Investment Trusts.
What Is REIT?
Real estate properties that generate revenue are owned and managed by real estate investment trusts, or REITs. REITs pool investor funds to buy and manage real estate, including warehouses, office buildings, residences, hotels, and shopping complexes. Investors seeking income find REITs a desirable investment because they pay at least 90% of their taxable revenue in dividends to shareholders.
Unlike mutual funds, which are generally based on equities and bonds, real estate investment trusts (REITs) are supported by real estate assets or mortgages. Each of them creates a portfolio of assets to support the units they privately or publicly sell to long-term investors through a private placement or an initial public offering. They could use secondary offerings and other techniques to raise more money. In addition to having a market-based price, each publicly traded unit has a net asset value equal to the portfolio divided by the number of outstanding units. Investors can transact directly on exchanges in publicly traded REITs.
Benefits of REITs
REITs usually offer significant liquidity to investors and are listed on a national exchange. These securities invest in a portfolio of real estate properties that are not accessible to retail buyers.
Because they tend to follow the real estate cycle, which typically lasts a decade or more, rather than the bond- and stock-market cycles, which last an average of about 5.75 years, REITs can profit from diversification.
REITs can serve as an effective hedge against rising inflation rates. In particular, REITs with commercial holdings frequently have agreements that allow them to raise rents in tandem with inflation.
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Risks of REITs
The real estate market as a whole and REITs in particular share many of the same risks, such as changes in property valuation, occupancy rates, and regional demand.
Interest rate changes can have an impact on property values and occupancy demand because real estate is usually very sensitive to these changes.
Rate of Usage Risk
REITs must keep specific occupancy levels to maintain the anticipated payouts. It is directly related to the rental prices that these places can fetch. Lower occupancy and rent prices might be bad for REITs.
REITs can have a narrow geographic focus where the majority of the property is in a particular area or region.
REITs can be highly susceptible to the underlying business or industry that leases the properties.
REITs Vs Real Estate: A Case Study
Let’s take a comparison test between a traditional and a REIT investment in India.
Let’s take one of the listed REITs in India.
Embassy Office Parks REIT
The company is trading for around 314 rupees and in the last year has given a dividend of around Rs 21 per share.
Let’s buy real estate and a REIT worth 45 lacs.
Your real estate will give you around 11K a month, translating the annual income to 132K INR.
45,00,000 / 314= 14331
Whereas the number of shares to be bought at 314 INR is approximately 14331.
Let’s take an assumption of Rs15 dividend per share. The difference is our margin of error. It is for the times when the company doesn’t find enough tenants somehow.
When you determine the total dividend received, it is around 2.14 lacs INR.
15 * 14331= 2,14,965
This amount is double the amount of your real estate, and remember, we took a margin of error of around 20%. If you remove this, your profit is more than 3x.
And since these REITs include commercial units, rent increases much faster, than your traditional real estate unit.
So, given that your stock is a safe pick, you can easily fetch 4-6x your traditional rental over 5-7 years.
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Best REITs to Invest in India
Embassy Business Centers REIT: The business was established in 2017. It is the owner and manager of 42.6 million square feet of office space, including office parks, buildings, and the National Capital Region.
Brookfield India Real Estate Trust: For investors seeking a long-term, low-risk investment, Brookfield India Real Estate Trust is a compelling choice. Its portfolio of assets, which includes grade-A offices and buildings spread across various regions, is well-diversified.
Mindspace Business Parks REIT: The Mindspace Business Parks REIT was established in 2020, and it has its headquarters in India. They specialize in creating and overseeing commercial real estate assets. It would be a good investment if you’re looking for long-term growth and a wager.
How To Invest In REITs
REITs can be bought or sold on any stock exchange where the REIT is listed. Check if any of the REITs are listed in your country.
For example, in India, you can invest in REITs via a stock broker such as Zerodha. Just type iut there names and buy the stocks.
You can use their other product to gain more knowledge about any company and how they are performing. (Such as Tickertape)
Taxation on REITs
The interest or dividend income from REITs is entirely taxable in the hands of the investor. This income will be a part of the taxable income. And it will be taxable as per the applicable tax rates.
Investors can access the real estate market conveniently and affordably with the help of REITs. REITs can assist investors in maximizing their real estate returns by offering diversification, high yield, liquidity, professional management, and tax advantages. Investors should select the best REIT, make long-term investments, think about buying a REIT index fund, keep an eye on the real estate market, reinvest dividends, and employ dollar-cost averaging to get the most out of their REIT investments. Investors can use the advantages of REITs to achieve their financial goals with appropriate planning and strategy.