One of the main criteria before investing in Real estate is looking at the Rental yields. In India, the rental yield for residential properties is only 3%-5% p.a. On the other hand, for commercial properties, the yield can range between 6%-10% p.a. So, it is evident that you should invest in commercial properties if you are looking for real estate investment.

But, property investment has always been perceived as an investment class for super-rich people due to huge capital requirements. REITs have opened the gateway to invest in real estate even with a small amount.

So, let’s find out more about REITs.

Concept of REITs

REITs are quite similar to mutual funds. They collect money from investors and invest it in real estate assets. REITs are listed on the stock exchange and regulated by SEBI. Currently, there are three REITs listed in the Indian Stock Market viz. Embassy Office Parks REIT, Brookfield India Real Estate Trust and Mindspace Business Parks REIT.

What will happen to REITs if the builder defaults?

REITs must invest 80% of their capital in already-developed real estate projects. Rest 20% can be invested in under-construction properties. So, even if the builder defaults, there is a chance of loss of only 20% of capital.

As per the regulation governing REITs, it is also mandatory to transfer 90% of the income earned to investors. This income is transferred on a half-yearly basis. This ensures a steady income for investors along with capital appreciation.

How do REITs help in portfolio diversification?

Real estate often acts as a store of capital and is generally less volatile than equity. REITs can provide much-needed diversification to your portfolio while acting as a store of capital and also giving steady dividends. REITs are liquid as they are listed on the stock exchange. Though, the Real estate generally gives good returns in long term. Therefore, an investment horizon of 7-10 yrs can provide better returns in REITs.

How to evaluate REITs?

Before investing in any REIT, check the following three parameters:

Occupancy Ratio: This ratio will tell you what percentage of total property is occupied by tenants. A higher Occupancy ratio will mean higher income for the REIT.

Tenancy Period: This will tell you the time period of the Rent agreement. A longer tenancy period will ensure that the REIT will receive rent from the properties for a longer period. 

Dividend Yield: A range of 6-7% dividend yield is generally considered good.

Taxation

If you sell REITs within a year then, you have to pay a tax of 15% on the capital gain. If you sell it after a year, then you have to pay a 10% tax on capital gain above Rs. 1 lakh.

The dividend received will be taxed according to your income tax slab rate. The dividend will be given after deducting 10% TDS.  Instead of directly investing in properties, REITs can also invest through another company known as Special Purpose Vehicle (SPVs). If this SPV does not opt for the special tax concession rate, the dividend received would not be taxable.

Conclusion

As of Dec’22, the current price of REITs ranges from Rs. 300-350. So, with very low investment, one can get exposure to real estate. There are high maintenance fees on REITs which generally range from 1-2% p.a. In the short-term, this would not reward you much or can even give negative returns. Therefore, it is important to keep a long-term vision and invest in it as per your financial goals.