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Real Estate Investment Trusts – Chota Daam, Bada Kaam! Author: Nikhil Agrawal | Date: April 6, 2021 | Read 4 min.

‘Don’t wait to buy real estate, buy real estate and wait.’

Roti, Kapda Aur Makan – This is perhaps one of the oldest quotes out there as the desi version of Maslow’s need hierarchy but it holds true even to this day. These basic most needs of an individual has been the builder of some of World’s largest businesses.

Undoubtedly, Real Estate is one of the best asset classes in the world to invest in and for most people, it is the first avenue that comes to their mind when they think of parking their surplus money. If used smartly, real estate can prove to be a source of regular income for its investors and it goes without saying how important a regular stream of income is in these uncertain times.

Along with the regular income, comes land appreciation value and again and it goes without saying that there is no real limit to the increase in value of land. More often than not, land value has had an upward trend (minus the sub-prime crisis of 2007—08 of course) and historically, investors have made windfall gains from real estate.

Like all other investments, real estate is not free from risks. There are aspects like environmental impact, vacancy risk, government regulations etc. that may unfavorably affect the value of real estate investments. The list is never-ending and so I will focus on the risk which is more related to this article – liquidity risk.

Real estate investments generally come with bulky ticket sizes and that makes it difficult to buy land with a small pocket unlike equity or gold and you need to have a sizeable amount of money to invest. That being said, the major issue out here is that real estate investments do not provide liquidity. An investor in need of money cannot possibly go out in public advertising his property and expect to get the value he wants instantly. To overcome this problem, there is an excellent financial product that makes it easier for retail investors to invest in real estate as per their appetite without bothering much about the ticket size and it takes care of the liquidity problem as well.

Yes! We are talking about Real Estate Investment Trusts (REITs).

Think of REITs as small shares of a large chunk of properties. They are traded in the market just like equity shares of publicly listed companies and hence they take care of the liquidity risk arising out as well as the problem of large ticket sizes involved in making real estate investments. REITs earn their revenue by renting, leasing or selling the properties they purchase.

REITs need to hold at least 80% of their assets in income-generating properties which mostly include hotels, hospitals, data centres, apartment complexes and industrial parks. The intrinsic value of REITs is determined by the consolidated value of properties held by them after subtracting the debt. In most countries, REITs are exempt from taxes if they pay 90% of their income through dividend to shareholders. Thus, it also acts as a regular source of income for them.

In India, REITs have been becoming popular of late. In the last 2 years, we have seen 3 REITs namely Embassy Office Parks, Mindspace and Brookfield India getting listed in the market, 2 of them being during the pandemic. Despite the pandemic, these issuances were successful in securing a satisfactory response from the investors. The major issue with REITs in India is that they are available in lots and hence investors need to chalk out a significant amount to buy REIT shares (a minimum INR 50,000 currently) which ultimately contradicts the whole concept of an REIT and does not make it an appealing investment avenue for retail investors. However, it is to be noted that this amount was brought down from a minimum of INR 2,00,000 last year in order to encourage more retail participation.

Although the recent stamp duty cuts by various state governments has resulted in an explosion in demand for properties, to make real estate a lucrative asset class, it is important for the retail investors to participate as well. The market regulator SEBI has been considering to bring down the minimum trading lot size to just a single unit much in line with the global practice. Hopefully, we shall see this as more REITs get listed.

When will this happen? We don’t know yet. But it would be a major step in the history of real estate in India and we hope it happens soon. Till that time let us just say

Invest in Real Estate & Your Money will never go waste 😛

 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of any agency, organization, employer, or any company. Fintuned Co. LLP shall not be held responsible in any manner whatsover, for any decision/action taken by readers on the basis of the content mentioned in the article. Readers are requested to exercise their best judgement before taking any decision/action. Fintuned Co. LLP shall also not be held responsible for any copyright infringement committed by the author in the process of writing and/or publishing this article and in the event any such offence is found, cooperate with necessary authorities to take remedial action

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