All You Need to know About REITs

A firm that owns, manages, or finances income-producing real estate is known as a real estate investment trust (REIT). REITs offer a mutual fund-like investment opportunity that allows regular Indians, not just banks and hedge funds, to profit from valuable real estate, provide the chance to access dividend-based income and total returns, and support the development, well-being, and revitalization of local communities. 

Anyone can participate in portfolios of real estate assets through REITs in the same way they can in other industries: by purchasing shares of individual companies, or through the acquisition of mutual funds or exchange-traded funds (ETF). A REIT's owners receive a portion of the income generated without really having to go out and purchase, operate, or finance real estate.

The creation of REITs in the United States was facilitated by President Eisenhower's signature of the REIT Act title as a component of the Cigar Excise Tax Extension of 1960. The US Congress initially created the REIT to provide US investors with the opportunity to finance and benefit from significant, professionally managed portfolios of diversified US real estate.

Mutual Funds and REITs both allow various investors to pool their money, and in both instances, the assets are handled by a designated Manager in a professional manner. The underlying asset of REITs is typically real estate holdings or loans secured by real estate, as opposed to mutual funds, where the underlying asset is frequently stock, debt, gold, or a combination of these.

Types of REITs

Retail REITs: These REITs must allocate at least 24 percent of their assets to commercial retail, including malls and independent retail establishments. 

Residential REITs: These Real Estate Investment Trusts own and manage rental apartment buildings as well as housing projects. 

Healthcare REITs: As implied by the name, these trusts invest and manage real estate mostly related to the healthcare industry, such as hospitals, nursing homes, retirement communities, and medical facilities. 

Office REITs: These are focused on purchasing and managing office space. This sort of REIT relies heavily on the rent it receives from tenants who have long-term leases as their primary source of revenue. 

Mortgage REITs: For these REITs, it is estimated that 10% of investments are made in mortgages rather than actual real estate.

REITs in India:

Real Estate Investment Trusts are a relatively new idea in India, and SEBI (Securities Exchange Board of India) adopted the first rules in 2007. The current SEBI REIT guidelines in India were created in September 2014.

There are 3 REITs now available in India for investment: Brookfield India Real Estate Trust, Mindspace Business Parks REIT, and Embassy Office Parks REIT. Future REIT launches from other illustrious real estate giants like DLF and Godrej are also anticipated.

In 2007, SEBI (Securities Exchange Board of India) issued the first regulations for real estate investment trusts, which are a relatively new concept in India. The SEBI REIT regulations that are in effect now in India were created in September 2014. 

A REIT in India is organised in a three-tiered structure with a Sponsor, Manager, and Trustee, each of whom is in charge of crucial duties on the Trust's behalf. According to SEBI, they are primarily responsible for the following things:

Sponsor: The sponsor is typically a real estate firm that was the previous owner of the properties before the REIT was established. For instance, BSREP India Office Holdings V Pte. Ltd., a division of Brookfield Assets Management Inc., a US corporation, is the sponsor of the Brookfield REIT. The responsibility for creating the REIT and choosing the Trustee belongs to the Sponsor. The REIT Sponsor and the sponsor group are also required by law to hold 25% of the units for the first three years after the creation of a REIT. After three years, the sponsor ownership may be lowered to 15% of all outstanding REIT units. 

Manager- Facilities Management-focused businesses frequently serve as REIT managers. For instance, Brookfield REIT's case has named Brookprop Management Services Pvt. Ltd. as manager. responsible for the REIT's asset management, investment decisions, and timely filing of required reports and disclosures.

Trustee - Organizations that specialise in offering Trusteeship services are frequently selected to serve as a REIT Trustee. For instance, Axis Trustee Services Limited serves as trustee for both Brookfield REIT and Embassy Parks REIT. Maintaining trusteeship over the REIT's assets for the benefit of unitholders is the Trustee's responsibility. They must also keep an eye on the manager's activities and guarantee that dividend payments are made on time.

Should you invest in REITs? 

REITs are a way to invest in commercial real estate without dealing with the hassle and expense of owning property outright. REITs also have a team of professionals who manage the property and make sure it's running smoothly. This decision is based on whether or not you have already optimized your asset allocation across Equity, Debt, and Gold, and you're not looking to invest in real estate.

Conclusion  

With more and more investors looking to diversify their investments in real estate, REITs serve as a perfect avenue for a diversified and secure investment. However, just like any other investment, REITs also require detailed research and due diligence before investing.

The article is written by Navin Dhanuka, MD & CEO, ArisUnitern RE Solutions.