3 things you should keep in mind while investing in REITs

If you are looking into invest in Real Estate to diversify your portfolio, but don’t have or don’t want to put a huge amount of money towards it, then the best way to do it is through REITs. 

Comparatively a new mode of investment,  REITs are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns. Currently, they invest largely commercial assets – primarily office spaces, explained Anuj Puri, chairman, ANAROCK Group. 

Post its registration with SEBI, units of REITs will have to be mandatorily listed on exchanges and traded like securities. Like listed shares, small investors can buy units of REITs from both primary and secondary markets.

Thus, besides low entry levels, REITs provide investors with a safe and diversified portfolio at minimal risk and under professional management, ensuring decent returns on investment. REITs will not only be characterized by investment in real estate assets – they will also offer limited liability for all unitholders. 

That’s not all. As per the guidelines, 80% of the assets must be invested in completed projects, and only 20% will be in under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities.

What is the basic difference between direct real estate investments and Reits? 

In REITs investors are investing in a diversified portfolio of commercial real estate assets. With the direct investment route for commercial office spaces, investors invest in a single office property.

What are the difference in returns for REITs and real estate investments?

Small investors will raise a pertinent question – will REITs be able to offer the same returns on investment that they can expect from ‘real’ real estate investments? The answer is no. Definitely, investors who are hoping for unrealistic returns (>20-30%) will need to look elsewhere. Being realistic in one’s returns expectations from REITs is important. A realistic ROI expectation would be in the range of 7-8% annually, post adjustment of the fund management fee.

With REITs, the ROI will be highly structured, realistic and risk-averse. REITs are ideal for investors who want a steady income with minimum risks. Moreover, investors can earn two types of income from REITs – one through capital gains post the sale of REIT units, and the other via dividend income. Moreover, REITs will be a good investment option for investors who are looking to diversify their portfolio beyond gold and equity markets.

Is it still too nascent to invest in Reits?

REITs have already been launched in India and have yielded very good returns for investors. The successful REIT listings in India have increased the interest in this new investment avenue and we expect more REIT listings to be announced soon

 

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