The Ultimate Guide to REITs in India

The Ultimate Guide to REITs in India

The Ultimate Guide to REITs in India will help unravel the potentials, shortfalls and everything in between when it comes to REITs in India.

What are REITs?

REITs, or real estate investment trusts, are companies that own and operate income-producing real estate. These companies manage portfolios of high-value real estate assets and mortgages and collect lease or rent on the same.

History of REITs in India

A few years ago, Real Estate Investment Trusts (REITs) were introduced to the Indian investment market for the first time. And since the first Indian REIT was listed in 2019, the listed REITs have returned between 10 and 12 percent, a decent return considering the pandemic's effect on the market. Even though the offices were closed and everyone was working from home, office transactions continued uninterrupted.

In FY 2021-22, a total of 34.1 million square feet of net office space would be leased in the seven largest cities in India, a 60 percent increase from FY 2020-21. In terms of new office supply, the top seven cities had a 27 percent rise to 51,2 million square feet in FY22. Compared to the FY21 fiscal year.

Why REITs?

Investing in commercial real estate is a safe approach to generate substantial profits.

However, most individuals lack the financial resources necessary to own and operate an office space in order to generate a profit. This is where REITs come into play, since retail investors seldom have the enormous cash necessary for such large transactions.

A REIT is a firm that holds a portfolio of commercial properties in order to produce income. You may invest in the commercial real estate industry with as little as 500 INR by purchasing a stake on the stock market.

REITs are comparable to mutual funds, except instead of investing in bonds, equities, and gold, they invest in tangible real estate.

Benefits of REITs:

Diversification is the second most important reason to invest in a REIT, after generating a substantial return.

If one desires to diversify into real estate but lacks the vast money required by the industry, REITs are a good choice to consider in addition to other investing opportunities. Commercial offices in India are a reasonably mature asset class with predictable returns due to their high-quality tenants and extended lease terms with built-in rental increases.

According to SEBI rules, REITs are prohibited from making speculative investments in land and may have no more than 20% of their assets in under-construction/other assets, making them a moderate-risk investment vehicle.

REITs are required to transfer ninety percent of their quarterly profits to investors, providing a reliable source of income coupled with capital appreciation.

Listed REITs provide investors with liquidity that conventional real estate investments cannot.

Tax advantages of REITs:

Distributions to REIT unit holders may be classified as dividends, interest, debt amortisation from Special Purpose Vehicles (SPVs), or a mix of the aforementioned.

REIT capital gains are subject to taxation based on the holding term. If an investor sells a REIT before three years, the profits will be deemed short-term and taxed at 15%. Over Rs 1 lakh would be subject to a 10% tax rate for long-term aims (without indexation). The dividend income received by REITs from SPVs is free from taxation, however dividends received from REITs are fully taxable to the investor at the appropriate slab rate.