The Most Authentic Guide on Personal Finance and Investments


Words of Wisdom : "No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant." ~ Warren Buffett

REIT is the new property investment strategy

Till now retail investors in India have had primarily only one way to invest in real estate — put in some down-payment, take a bank loan and buy a property. 

In this process, he has to take care of everything... from search and purchase; to verification and registration; and finally to renting and maintenance. Moreover, his exposure is limited to one or at best a few properties. And that too mainly land and residential. Number of retail investors owning a commercial property is minuscule.

In such a scenario, Real Estate Investment Trusts (REITs) provide a new and exciting opportunity to invest in properties, more particularly commercial, at the retail level. 

REIT, as the name suggests, is a trust that raises small deposits from a number of investors to create a large pool of money. This money is then primarily   
1) Invested in a number of ready commercial properties. The objective is to generate a regular source of rental income, which is passed on to the investors as their returns. Besides this, the fund value (and accordingly the NAV) also appreciates with the appreciation in property prices, and/or
2) Lent as mortgages to property buyers / invested in mortgage-based securities. The objective is to generate interest income. 

In short, REIT functions like a typical mutual fund. The advantages being
...exposure to a wide variety of commercial and premium projects (such as shopping malls, office complexes, hotels etc.)
...search and investment done by the property experts
...verification done by the legal experts
...no cumbersome paperwork
...no maintenance worries
...low investment threshold amount
...quicker transactions and much lower expenses
...high liquidity and part-redemption possible
...earning high rental income 

Of course, nothing comes free of risk. One primary risk in REITs is not being able to fully rent out the properties invested in. Default by tenants / borrowers is also a risk. Economic slowdown resulting in lower rentals / sluggish capital appreciation is another risk that REITs are prone to.

Another disadvantage of REITs is the absence of leveraging. Normally properties are purchased with a high component of loan, many times going up to 80-85%. This comes at around 10-12% cost. Whereas, the appreciation in property prices have historically been around 15-18%. This 5-6% gains on a corpus running into tens of lakhs translates into handsome gains. As such many people have become millionaire and crorepatis even by investing only a few lakhs of their own money. This will not happen with REITs.

Appropriate regulations in this regard are being worked upon by SEBI, so that a sound and robust product can be made available to the common investors keen to participate in real estate... without the attendant hassles. To begin with, minimum investment of around Rs.2 lakhs is being deliberated upon.

While similar kinds of funds are available even today, these are in the nature of private placement and targeted to the HNIs (High Networth Individuals) where the minimum investment could be in the range of Rs.10-25 lakhs. One key difference being that these funds invest in new projects and as such capital gains through appreciation is the primary objective rather than the regular rental / interest income in REITs.

By the way, it may be mentioned that in 2008 too SEBI had tried to introduce REITs. However, their attempt was not successful due to various reasons such as worldwide financial crisis of 2008, suspect ownership title quite common, lack of transparency in real estate transactions, cash deals, unauthorized constructions, illegal occupation, ineffective legal system, very few companies specialized in property maintenance etc. As such, despite SEBI announcing the regulations, there were no takers for it. Hence, the matter just fizzled out.

So one has to wait and watch how the scenario unfolds this time. Hopefully, we will see a positive response and get an opportunity to invest in a very useful product. 

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