Real estate properties in India have always been a lucrative investment option. They have historically given greater returns than most traditional instruments. More so, the demand for housing properties increased exponentially after the COVID-19 pandemic, making them a popular investment instrument in recent times.
However, real estate investments have always been associated with high-net-worth individuals or HNIs. This is due to a misconception that one needs a lot of money to invest in a real estate property. However, with new trends making headways in this industry, investing in real estate, even with smaller amounts, is now possible.
Real Estate Investment Trusts or REITs can provide several advantages over owning physical properties. For one, they allow investors to diversify their real estate holdings across multiple properties and geographies, which can help reduce risk. Additionally, REITs offer a more liquid investment than owning a physical property, as investors can easily buy and sell shares on public stock exchanges.
What are REITs?
A Real Estate Investment Trust or a REIT is a company or institution that collects money from investors and uses it to manage, maintain, and sell real estate properties. In a way, REITs behave like mutual funds that pool money from investors with common investment objectives and then invest that money in market-linked instruments.
As an investor, one can invest in a REIT to seek greater returns from the real estate industry. The REIT company chooses the projects it wants to invest in and pays for its properties’ maintenance. Then, when the company incurs profits, it distributes them to its investors as ‘dividends’.
Another benefit of investing in REITs is that they often have professional management teams responsible for managing the properties in the portfolio. This can include leasing out vacant space, managing tenant relationships, and maintaining and improving the properties. This can save investors the time, effort, and expense of managing properties themselves.
What are the different types of REITs?
An investor can select from three types of REITs while adding them to their investment portfolios and understanding the types of REITs and their characteristics before investing is crucial. Each REIT type has a specific purpose and is suited for a particular investor.
Below are the three types of REITs in India explained:
An equity REIT, also known as an eREIT, focuses on investing in real estate properties nationwide and generating rental income. These are the simplest REIT type, allowing investors to invest passively in real estate assets. An eREIT performs various functions such as building, developing, repairing, and managing real estate properties it has invested in.
An equity REIT can invest in both residential and commercial properties. The rental income generated is used to pay for property management and provide investors dividends. If an equity REIT sells a property, it distributes the profits among investors as “capital gain distributions”.
Equity REITs can be further divided into public REITs and private REITs. Public REITs are traded through the stock exchanges, while private REITs can be purchased through brokers or distributors.
A mortgage REIT, or mREIT, does not own real estate properties directly. Instead, it provides financing for mortgaging properties. It also purchases mortgage-based securities. Banks pay interest to mREITs.
Since mREITs do not physically own real estate properties, they won’t have to bother about developing, repairing, or managing them. So, in a way, their job is only to lend money for real estate mortgaging and earn interest on it.
Like equity REITs, mortgage REITs are also traded on the stock exchanges. However, an investor should remember that these REITs can be riskier than others. It’s because any changes in the interest rate can impact their earnings.
As the name suggests, hybrid REITs are formed by combining equity and mortgage REITs. These REITs perform the dual function of owning real estate properties and investing in mortgages. In addition, these REITs offer investors more flexibility as they can change their portfolio allocation per the prevailing market conditions.
Also, since hybrid REITs invest in equity and mortgage REITs, they carry the minimum overall risk. For example, when home loan interest rises, it can negatively impact equity REITs, but mortgage REITs tend to benefit from such a situation. However, a hybrid REIT can provide the best of both worlds.
Hybrid REITs are best suited for novice investors still determining their real estate investment strategy. One can invest in hybrid REITs through stock exchanges or brokers.
REIT real estate allows investors to diversify their investment portfolio and earn good returns. In the long run, REIT investment returns are often better than most traditional instruments. However, one should research for the best REITs to invest in before investing their hard-earned money, and choose their REIT type wisely.
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