Unlocking the Power of Real Estate Investment Trusts (REITs)
Key Takeaways:
Coming from a YouTube chat with a top CFO, this post explores the tremendous potential of Real Estate Investment Trusts (REITs) as a lucrative and relatively low-risk investment opportunity. Here's a quick roundup of what you'll find in this -
- Understanding REITs and their mammoth potential in Indian market
- The advantages of investing in REITs over traditional brick-and-mortar real estate
- Implications of investing into REITs on your tax returns
- How the recent pandemic affected the REIT market
Demystifying REITs
A REIT, short for Real Estate Investment Trust, is a modern investment instrument that enables anyone to invest in portfolios of real estate. In India, this concept is still relatively nascent and is often overlooked due to the dominance of conventional real estate investments. But the fact remains that REITs bring in a hitherto unexplored sector of real estate to the common investor - commercial real estate.
REITs are especially advantageous due to the consistent income they generate via rent from commercial properties and capital appreciation.
Comparing REITs and Real Estate Investments
Investing directly into property usually involves high ticket sizes, not to mention the hassles of property management post-investment. On the other hand, investing in REITs is as easy as buying and selling shares in the stock market. What's more, with a REIT, your minimum investment can be as low as a few hundred bucks.
Investors also need not worry about factors like constructing the property and ensuring its upkeep, as these are managed by professional firms that specialize in property management.
Understanding the Tax Implications
Investing in REITs has certain tax implications that investors need to understand. Here's a simplified explanation -
When a REIT distributes dividends, part of it is tax-free income (to the extent of 70%). However, when the investor sells the REIT units, the profit would be calculated after adjusting for any capital repayments made by the REIT during the holding period.
This capital repayment component reduces the acquisition cost of the REIT units and therefore, could mean a higher capital gain tax for the investor at the time of selling the units.
REITs in the Time of Pandemic
The pandemic impacted the rental real estate market globally. While it did affect the income of many REITs due to the closure of commercial spaces, it also presented an opportunity. The fact that tenants, especially in busy cities and valuable spaces, did not want to vacate even during these tough times shows the trust and the high potential of quality real estate.
For investors, the need of the hour is to consider the economic impact of COVID on the property's location, tenant industry, and the lease structure to assess the potential risks and returns.
The Future of REITs in India
Despite being a newer concept in the Indian market, understanding and adopting REITs is rising, and they are set to play a key role in real estate investment portfolios. The potential is vast as tier-2 and tier-3 cities are still very underpenetrated and present a great opportunity for retail growth which can be capitalized on through REITs.
There are only endeavours to grow the portfolio in the upcoming years. Thanks to robust regulations and the coming together of many financial institutions and investors, the future for REITs in India looks promising.
To summarize, REITs offer a unique opportunity to invest in commercial real estate without owning physical properties and with much lower capital. The returns potential is significant considering the gap between supply and demand for grade A office spaces across India.