For Indians, real estate has traditionally been the most desired and favored asset class. Plots, houses, apartments, and commercial properties are all popular investment options. The average Indian household maintains 84 percent of its assets in real estate as well as other physical items, 11 percent in gold, and the remaining 5% in financial assets.
Surprisingly, investor interest in real estate, particularly residential real estate, has fallen dramatically over the last decade due to low capital appreciation. For example, according to the National House Bank’s (NHB) home price index, composites housing prices in 50 Indian cities climbed by only approximately 4% yearly from June 2013-September 2020.
When inflation is included, the returns are negative. Investing in residential property with low rental rates of 1.5 percent to 2.5 percent doesn’t really appear to be an appealing proposition. Commercial properties have higher rental rates, but they require a large investment.
Indian investors, on the other hand, have been flocking to Real Estate Investment Trusts in recent years (REITs). Here’s additional information on REITs, which are real estate investment trusts.
Also Read: Fractional Ownership & REITs: Questions Answered By A Professional Real Estate Lawyer
What exactly are REITs?
A REIT is a real estate investment trust that holds income-producing properties. In India, a REIT can currently only invest in commercial properties. REITs combine money from investors and invest it in real estate, similar to mutual funds. The best thing about REITs is that they allow retail investors to participate in commercial real estate, particularly Grade ‘A’ office space holdings that would otherwise be out of reach.
While REITs are new to the Indian market, they have long been available to investors abroad. REITs, for example, are well-established investment possibilities in the United States, Singapore, and Japan, and they also attract a large number of investors. REITs account for nearly half of the capitalization of the real estate industry in markets like Singapore and Japan, where the concept has been introduced almost two decades ago, while those account for 96 percent of market share capitalization in the US, which pioneered REITs in the 1960s, according to a CRISIL report from 2019.
Also Read: REITS inclusion in Nifty for real estate investments- Everything you should know!
Why choose a REIT over a physical property?
Investing in actual real estate necessitates a substantial sum of money, as well as the time-consuming task of locating the ideal home. Deterrents include maintenance, liquidity, taxation, and transaction costs. Most people want to own their own home. Beyond that, any real estate investment must be considered in terms of returns (growth) and return on investment (return on investment) (income or rental). Rental yields in the residential sector are not particularly high, and we all know that appreciation and growth take time. Demonetisation, RERA, and pandemics can all throw your plans off, so avoid real estate if liquidity is essential for your portfolio.
Investing in REITs, on the other hand, is a terrific method to diversify in the real estate industry; it’s similar to buying a mutual fund rather than a single stock. REITs can also help you generate higher profits than physical real estate investments. REITs allow investors to invest in high-quality, high-yielding real estate that is typically unavailable to individual investors. One must consider whether this makes sense in addition to their existing real estate assets, which most people do.
Regular income or capital appreciation?
The dilemma is whether you should invest in REITs for capital appreciation or regular income. In India, the options are restricted – we know that worldwide, REITs meet both goals. It’s better for someone who wants consistent income rather than capital appreciation, although the income after expenses and taxes will be equivalent to debt products. If that’s fine, REITs could be a nice diversifier.
Also Read: REITS inclusion in Nifty for real estate investments- Everything you should know!
Experts, on the other hand, argue that REITs are not ideal for senior persons seeking a steady stream of income. Senior individuals seeking a consistent income, low volatility, and capital protection should avoid REITs. Because REITs offer similar returns to debt products, a Senior Citizen would be better off investing in debt.
REIT income is subject to taxation
When you invest in a REIT, you get dividends during your holding period and generate capital gains/losses when you sell the units. In the hands of investors, dividends are completely taxed at the applicable slab rate. If the holding term was less than one year, capital gains from the sale of REIT units are classified as Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) respectively. The STCG tax rate is 15% on capital gains from the sale of units, whereas the LTCG tax rate is 10% on gains over Rs 1 lakh (across all equity investments for the applicable FY) with no annual inflation advantage.
The dangers of investing in REITs
REIT investment is a concentrated investment; underlying buildings may have periods of no occupancy, legal wranglings, problems with rental yields/non-occupation, or lower offtake for office spaces due to COVID circumstances, among other things. Another disadvantage is the lack of a real standard against which to assess REITs.
Can REITs outperform other assets in terms of returns?
Each of these investing possibilities has its own set of goals. Debt instruments can be used for both liquidity and income. Long-term growth is the goal of the equity asset type. Once the REIT market develops, 10% of one’s net wealth can be invested in REITs.
Given that fixed income instruments were currently offering historically low-interest rates as well as the equity market is trading at an unusually high price-to-equity ratio, a REIT can provide a retail investor with diversification into an alternate asset class. In comparison to any equity-oriented product, REITs cannot deliver higher yields after expenses and taxes. Only a debt-oriented product can compare to their results.
The pandemic’s impact on REITs
As previously stated, REITs in India are only permitted to engage in commercial real estate, particularly office spaces with a predictable income stream. However, because of the pandemic, many businesses have permitted their workers to work from home, casting doubt on the demand for office space and, ultimately, the REIT’s survival. Experts feel that REIT investments should be approached with caution. As we all know, the pandemic has had a greater impact on commercial real estate, and it may take some time for these to recover.
Most real estate stakeholders, on the other hand, believe that as the situation stabilizes, demand for superior office space would increase. As a result, this could be a good moment to buy REITs because values are cheap. However, only invest in a REIT if it is appropriate for your fund schemes and risk profile.
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