5 reasons to invest in REITs and InvITs | My Money Sage
While investing in Real Estate retail investors face two challenges one is the ticket size and the other one is liquidity, this is where REITs and InvITs come handy.
What are REITs and InvITs?
Real Estate Investment Trusts (REITs) invest in and manage commercial real estate. They earn rental income from their investments, which they pass on to their investors. Investors also profit from capital appreciation in the underlying assets. REITs have to distribute 90% of their cash flows to their investors at least once in six months.
Infrastructure Investment Trusts (InvITs) have similar structures, but they invest in and manage infrastructure projects. REITs and InvITs are suitable substitutes for investments in physical real estate, which usually involve taking on a lot of debt. Debt is not necessary in this case because of the smaller size of the investment.
The Securities and Exchange Board of India (SEBI) has made it easier for small investors to put money in REITs and InvITs. In April 2019, capital market regulator SEBI reduced the minimum subscription amount for REITs from Rs. 2 Lakhs to Rs. 50,000 and for InvITs from Rs. 10 Lakhs to Rs. 1 Lakh.
In the past, retail investors could only invest in REITs and InvITs through the National Pension Scheme (NPS) and mutual funds.
SEBI’s move will bring REITs and InvITs within reach of small investors. They will be able to diversify and get better returns than traditional fixed-income investments. However, investors need to remember that returns are not guaranteed and they need to invest for the long run.Learn how to mange your money & create wealth, Download your FREE eBook now
How do REITs and InvITs work?
REITs are like mutual funds that invest in commercial real estate instead of investing in debt or equity. REITs either buy real estate or are involved in real estate development. They generate returns through rental income and capital appreciation. REITs pass on these returns to their investors in the form of dividends.
REITs first launch their Initial Public Offers (IPOs) that are open to investors. After the IPO, the REIT’s shares list on the stock exchange, from where investors can buy and sell them.
An InvIT is like a mutual fund that collects money from investors and invests it in infrastructure projects. It may make direct investments or invest via a Special Purpose Vehicle (SPV). InvITs are of two types — one type invests in completed projects that generate revenue. The other type can fund both completed and under-construction projects.
InvITs that invest in completed projects make public offers of their units. Those that invest in under-construction projects offer their units through private placement. Both types of InvITs list their shares on the stock exchange.
Taxation of income earned by REITs and InvITs depends on its source. For example, the interest income of REITs is subject to tax as interest income. Rental income of REITs is subject to tax as income from house and property. Dividend Distribution Tax (DDT) does not apply to REIT dividends.
SEBI notified the regulations governing REITs and InvITs in 2014. These regulations were expected to attract investments in commercial properties and infrastructure projects. There were hopes that REITs and InvITs would become popular in India. However, the response from investors has been somewhat disappointing.
REITs and InvIT shave not been able to attract investors despite various relaxations offered by SEBI. As a result, SEBI has reduced the minimum subscription amount for REITs and InvITs to boost investor participation in this sector.
How can I invest in REITs and InvITs in India?
You can invest in a new REIT when it comes out with its Initial Public Offer (IPO). If your application is accepted, you will get units of the REIT. SEBI has reduced the minimum investment amount for REITs from Rs. 2 Lakhs to Rs. 50,000. You can also buy the shares of existing REITs from the secondary market.
You can invest in a new InvIT that funds completed revenue-generating projects when it comes out with its IPO. An InvIT that invests in under-construction projects may allot its units through private placement. However, both types of InvITs have to list on the stock exchange, where investors can buy and sell them. SEBI has reduced the minimum investment amount for InvITs from Rs. 10 Lakhs to Rs. 1 Lakh.
Should you invest in REITs and InvITs?
Yes, here are 5 reasons why you should invest in REITs and InvITs:
1.Opportunity to Invest in an asset class that was previously unaffordable
REITs and InvIT shave brought commercial real estate and infrastructure projects within reach of small retail investors.
By investing in REITs and InvITs that have many assets, you can diversify your investment portfolio, which reduces risk and provides more stable returns in the long term.
REITs and InvITs make it easy for you to enter and exit from the real estate sector. It isn’t easy for a small investor to buy or sell a property.
4. Generates Fixed income
REITs and InvITs could be a good alternative asset that can help generate fixed income for retirees.
5. High-quality asset maintenance
REITs and InvITs help to avoid fragmentation of holdings among many owners. High-quality asset maintenance helps to ensure that assets will keep generating good returns in the long run.
REITs and InvITs can be part of a well-diversified portfolio. However, it may be too early to make substantial investments. REITs and InvITs are still in the initial stages and don’t have a track record.
SEBI’s move to reduce the minimum investment amounts for REITs and InvITs is welcome. It will allow retail investors to gain exposure to commercial real estate and infrastructure projects. Retirees will have another investment avenue to diversify and generate stable returns in the long term. However, small investors need to understand the risks, returns, and tax implications. These products are new and are still evolving, so it may be best to wait until we know more about them.