Real Estate Investment Trust – A unique mode to invest in real estate
- Blog|Company Law|
- 3 Min Read
- By Taxmann
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- Last Updated on 14 April, 2022
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India has always been a country where immovable property or real estate is viewed as an important asset to possess. Indians take pride in owning immovable property. Except in the last couple of years, as an asset class, real estate has outperformed the traditional low-risk financial investment avenues such as bank deposits, debt securities, etc.
One key deterrent or entry barrier for real estate investment is the high absolute amount to be committed for investment. This has led to emergence of alternate modes that provide investors an opportunity to invest in real estate at a small ticket-size. Investment through Real Estate Investment Trust (REIT) is common in various countries such as the USA, UK, etc. (market value of publicly traded US REITs was $968 billion as of May 2017). Further, public listed REITs in USA paid out approximately $55.7 billion in dividends during 2016 and generated returns for investors.
Given the advantages of REIT for the Indian economy, the government and regulators in India have established a comprehensive enabling framework for REITs to come up in India.
The REIT is like a mutual fund investment in the real estate sector – money pooled in by the REIT would be invested primarily in real estate. The regulations require at least 80% of the value of asset of the REIT to be in completed and rent generating real estate assets, with a mandatory stipulation that a minimum of 90% of the income would be paid to unit holders every six months. This would allow retail investors to obtain regular dividend return plus upside on rental increase and capital appreciation of real estate property owned by the REIT at a fraction of the investment that is otherwise required for owning real estate. Additionally, there is saving of stamp duty costs.
Investors seeking a higher return vis-à-vis traditional debt instruments along with lower risk, which is normally associated with equities, would find the REIT a worthy avenue for investment. Equity instruments offer high rewards but also have high risks. Debt offers safety but also very low returns post tax (for instruments such as fixed deposits, bank savings account, etc.) and no capital appreciation. An REIT offers an opportunity to own a hybrid instrument with potentially higher returns than a typical debt instrument but lesser risk than a pure equity instrument. Potentially, an REIT would offer stable low risk return with upside through increase in future rentals and capital appreciation of the underlying property value. Moreover, investor risk is diversified, much like investment in mutual funds, as there is usually more than one underlying property and a window available at all times to sell REIT units on the stock exchange. Furthermore, capital gains are also exempt on such sale where the REIT units are held for more than three years.
An REIT would need to comply with various SEBI regulations, and consequently, would have a professionally qualified management team who administer it in the best interest of the unit holders.
To sum up, investors would have clear return expectations from REIT, which is unlike an equity investment. Return expectation from equity is uncertain, as it is based on future growth potential. Investors would prefer an REIT that offers stable and regular returns with an opportunity of increase in rental values and capital appreciation of the underlying REIT asset. A lot would depend on the actual performance and consistency of distribution of the REIT.
Therefore, is it the right time to invest in an REIT once they are floated? Probably yes. However, as a matter of caution, which is applicable to all types of investment, check the quality of the underlying assets owned by the REIT and the management team behind the REIT, as you would check for a mutual fund. If they tick the right boxes, you may be good to go ahead and invest in the REIT.
Authors: Hiten Kotak, Leader – M&A Tax, PwC India and Suraj Malik, Director – M&A Tax, PwC India
Disclaimer: Views expressed are personal to the author. Article includes inputs from Akhil Mohata, Manager, M&A Tax PwC India.
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