Irrespective of the market situation, real estate is one investment Indians have always been interested in. Since everyone doesn’t have a big pile of money to invest in physical real estate, REITs (real estate investment trusts) are a decent option, especially for investing in commercial real estate.

REITs have been gaining enough prominence for the past 3-4 years due to their lower entry barrier and the fact that they also give rental yields. But are they worth the hype or not? Let’s find out.

First, the good thing about investing in REITs

India has always had issues when it comes to real estate in terms of cash flow or project delays. However, one of the better things about REITs is that they can overcome these problems, since they must spend at least 80% of investors’ funds on finished, revenue-producing commercial projects. 

Additionally, long-term leases often safeguard REIT assets ensuring investors are not exposed to too much risk. 

The not-so-good part of investing in REITs

REITs have a market capitalization of around Rs 80,000 crore. However, their trading volume is extremely low. Thus, despite being a substantial industry, REITs are rarely purchased and sold. As a result, investors risk being stuck with their investments in REIT. 

Further, even though it isn’t an ideal comparison, fixed income instruments like bonds and bank deposits are appealing more to investors due to growing interest rates. Therefore, a lot of people prefer to invest in them.

Another reason for low liquidity is lack of awareness around REITs.

Also Read: How is income from Mutual Funds taxed in 2024?

How have REITs performed?

Here is a comparison of top REITs in the country:

Now, you might say the returns are underwhelming but it must be understood that REITs are fairly new. And they started around the time the epidemic struck. 

Therefore, they haven’t yet had the chance to show the investor their true earning potential. 

What about the taxation of REITs?

As far as taxation is concerned, let’s simplify it a bit.

The investor’s dividend amount is tax-free since three REITs have all made investments in special purpose entities (SPVs) that have chosen not to use the concessional tax rate, or else it would have been taxed at your slab rate.

If you are wondering what SPV is, kindly check here.

Conclusion

Since most of the REITs are commercial REITs and companies have started prioritizing Work From Office, we could see an upside in coming years. Moreover, SEBI has proposed the concept of Micro REITs which will help you own a fractional part of a large property with a minimum investment amount of Rs 10 lakh. 

REITs are believed to be a game-changer because a person can own a small share of a physical building. Also, SEBI has proposed to set direct norms for expenses being listed by REITs so that investors aren’t charged extra and can get fair dividends.

However, investors should take note of the fact that REIT industry in India is pretty young. Only time can tell whether it will succeed in offering a lot to investors or not.

As an investment product, REIT may be good for some and bad for others. We can’t generalise whether it will be good for you or not. As its suitability all depends on your personal financial goals and risk profile.

Disclaimer: The above content is for informational purposes only. You should consult a SEBI-registered Investment Advisor before investing in REITs and other instruments.