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REIT or Real Estate Investment Trust is a company that owns
or funds the income producing Real Estate. REIT provides its investors all
types of regular income streams, diversification and the long term capital
appreciation. It allows every investor the opportunity to invest into large
scale income producing Real Estate the way one would invest into stocks, mutual
funds or debentures. It provides access to highly capital intensive large scale
commercial Real Estate to the average investor.
What are the benefits of REIT fund?
Access
to income producing Real Estate at low investment: REIT funds provide
common investor an access to income producing large scale Real Estate with very
low investment. Typically, if someone has to invest in a small commercial property
of 500 sq ft in a city like Bangalore, you would have to make an investment of
minimum Rs. 35 – 40 Lac. With REIT fund, you can reap the benefits of higher
return on large scale commercial projects at the fractional cost (Rs. 1- 2 Lac)
· Diversification
of your investment portfolio: It provides you an alternative and
diversification to your investment portfolio. As mentioned in my earlier post,
Real Estate is an important class to be a part of your investment portfolio and
investing into REIT funds provide you that diversification. Also returns in
REIT have a very low correlation to the Broader markets and thus are very consistent.
This also reduces the risk in your investment portfolio
·
Inflation
Protection: REITs provide natural protection
against inflation. Real estate rents and values tend to increase when prices
do. This supports REIT dividend growth and provides a reliable stream of income
even during inflationary periods.
·
Performance:
REITs across most of the international markets have delivered better
growth and income as compared to most of the asset classes like corporate Bonds
etc
·
Liquidity:
REITs are listed on the stock exchanges and are trade-able instruments
thus providing easy liquidity as compared to the Real Estate investment.
·
Transparency:
REITs are professionally managed funds with very strong corporate governance rules applicable to
them. They are traded in open markets and thus are transparent to Markets as well as there is transparency in taxes applicable on returns
generated through them.
In addition to the investment performance and portfolio
diversification benefits available from investing in REITs, REITs offer several
advantages not found in companies across other industries. These benefits are
part of the reason that REITs have become increasingly popular with investors
over the past several decades.
REITs'
reliable income is derived from rents paid to the owners of commercial
properties whose tenants often sign leases for long periods of time, or from
interest payments from the financing of those properties.Most REITs operate
along a straightforward and easily understandable business model: By increasing
property occupancy rates and rents over time, higher levels of income may be
produced. When reporting financial results, REITs, like other public companies,
must report earnings per share based on net income as defined by generally
accepted accounting principles
Types of
REITs:
REITs are classified
into 2 broad categories:
Equity REITs:
Equity REITs mostly own and operate income-producing real estate. They increasingly have become real estate operating companies engaged in a wide range of real estate activities, including leasing, maintenance and development of real property and tenant services. One major distinction between Equity REITs and other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own portfolio rather than to resell them once they are developed.
Equity REITs mostly own and operate income-producing real estate. They increasingly have become real estate operating companies engaged in a wide range of real estate activities, including leasing, maintenance and development of real property and tenant services. One major distinction between Equity REITs and other real estate companies is that a REIT must acquire and develop its properties primarily to operate them as part of its own portfolio rather than to resell them once they are developed.
Mortgage REITs:
Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Today's Mortgage REITs generally extend mortgage credit only on existing properties. Many mortgage REITs also manage their interest rate and credit risks using securitized mortgage investments, dynamic hedging techniques and other accepted derivative strategies.
Mortgage REITs mostly lend money directly to real estate owners and operators or extend credit indirectly through the acquisition of loans or mortgage-backed securities. Today's Mortgage REITs generally extend mortgage credit only on existing properties. Many mortgage REITs also manage their interest rate and credit risks using securitized mortgage investments, dynamic hedging techniques and other accepted derivative strategies.
The 3rd category that has started emerging is the
Hybrid category that deploys funds in both the above categories i.e. direct
investments into properties as well as mortgages.
REITs are strangers to Indian market. SEBI on 26th September 2014 laid the detailed framework for the registration and regulation of REITs in India. Post that some of the large Real Estate companies like DLF have started readying for the launch of their REIT funds. This is the asset class that will see a lot of activity in coming 8 to 12 quarters once the economy picks up demand for Real Estate starts picking up.
Do revert with your comments and feedback.
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