Real Estate Investment Trusts (REIT) provides you an opportunity to invest in real estate without investing in an actual land or property or in stocks of a real estate company.
In this video, we shall look closely at the workings of Real Estate Investment Trusts (REIT).
01:35 WHAT IS A REAL ESTATE INVESTMENT TRUST?
03:33 REITs IN INDIA
05:50 DISTRIBUTION OF RETURNS
09:06 TAXATION OF REITS
12:09 SHOULD YOU INVEST IN REITs?
👉 WHAT IS A REAL ESTATE INVESTMENT TRUST?
Real Estate Investment Trust or REIT is an entity, a trust that owns, operates or finances income-generating real estate.
As a construct, REITs work a lot like mutual funds wherein multiple investors can pool in their money which is then given to a professionally managed REIT fund. This fund is much like how a mutual fund purchases stocks then goes about buying commercial properties like offices, hotels, hospitals, malls etc. The rent earned from these properties or the profits made on the buying & selling constitute the income for REIT investors which is then transferred to them in the form of dividends
Mortgage REIT – primary operation is not to buy and manage properties but to loan out money or finance other investors, who then invest in real estate.
👉 REITs IN INDIA
The concept of REITs is relatively new in India and the first guidelines were introduced by SEBI i.e. the Securities Exchange Board of India in the year 2007 which then got approved as regulations in 2014
Now, the SEBI regulations and the subsequent amendments were the first positive steps taken by the regulator and the Indian government towards making REITs an attractive investment option. And since then, a lot of headway has been made especially when it comes to looking after the investor’s interest
– Setup only as a trust and not as a company or LLP
– Tradeable on the Indian stock exchanges
80% in rent-generating commercial properties
20% in buying stocks, giving loans, or investing in an under-construction property
– Mandatory distribution of 90% of the net distributable cash earnings
– Tax exemptions on rental income, leasing, interests and dividends
👉 DISTRIBUTION OF RETURNS
REITs offer two classes of returns
Distributable returns which are in the form of dividends, interest and return of capital
Returns from REITs is via the capital appreciation route which is the rise or fall in the value of its NAV in the stock markets
REITs cannot sit on the cash flows they earn. They are required to distribute not less than 90% of the cash flows they receive after being allowed to deduct some expenses like management fees, depreciation, maintenance etc.
👉 TAXATION OF REITS
All Interest payments are taxed as per income tax slabs
Dividends are non taxable
Amortization of SPV is non taxable
-Profits earned on holdings less than 1 year are short term capital gains and are taxed at 15%
Profits on beyond 1 year holdings are long term and are taxed at 10% in excess of 1 lakh
Capital Gains on international REIT Fund-Of-
The holding period is less than 3 years, then it will be deemed as short term capital gains and will be taxed as per an investor’s income tax slab.
The holding is beyond 3 years, then its long term .. and is taxed at 20% with indexation benefits
👉 SHOULD YOU INVEST IN REITs?
Regular income generation
Low investing threshold of 50,000 rupees
REITs in India is limited
Taxability element on interest earned
The underlying asset in REITs are commercial properties which are not insulated from economic calamities like recessions and lockdowns
REITs should not be equated with equities and hence, it is not likely to give equity type returns. REITs do look promising and if not now, then definitely in the future as the sector matures from the recent baby steps it has taken.One can certainly start small and the exposure to REITs can be kept to a min-max of 5 to 10% of your portfolio
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