What is REIT (Real Estate Investment Trusts) With Its Types & Benefits?

REIT (Real Estate Investment Trusts) Meaning, Its Types & Benefits

In the last few years, the real estate industry has experienced a significant surge in India. Due to the rising demand for residential and commercial properties, real estate is slowly emerging as a popular investment avenue. Real estate investments are not only known to offer a lucrative ROI but are also considered relatively safer and suitable for even individuals with a low-risk appetite. These days, more and more individuals are turning to the real estate market when it comes to investing their hard-earned money.

However, because of the skyrocketing property prices, this is not necessarily a feasible option for everyone. Investors who have a limited budget may find it difficult to find a real estate property that can guarantee a good return. This is when the concept of REITs, or real estate investment trusts, comes into the picture. REITs have gained huge popularity among property buyers as they allow an individual to make a real estate investment without having a large capital.

Now you must be wondering what real estate investment trusts are and how do they work. Here’s a detailed explanation of REIT’s meaning, its types, key benefits, and a lot more:

What is REIT?

A real estate investment trust (REIT) can be defined as an entity that handles real estate transactions across a range of property sectors to generate. These companies manage portfolios of high-value real estate properties and mortgages. For instance, a REIT will lease different properties and collect the rent. Later, this collected rent gets distributed among all the shareholders as income and dividends.

In order to qualify as a REIT, an entity needs to meet a number of requirements, such as:

Should be registered as either a business trust or a corporation.
Extends fully transferable shares
Needs to be managed by a team of trustees or a board of directors
Must have at least 100 shareholders
Need to pay at least 90% of the taxable income as a dividend
Should accrue 75% or more of gross income from mortgage interest or rents
At least 75% of investment assets should be in real estate.
95% or more of the total income should be invested

Types of REIT

There can be several different types of real estate investment trusts. Here is a detailed classification:

On the Basis of Income Source

Equity REITs: This is the most preferred type of real estate investment trust. These REITs mainly generate their revenues through rental incomes on their real estate assets. Generally, equity REITs focus on a particular segment, such as commercial, healthcare, residential, etc.
Mortgage REITs: Also known as mREITs, these entities mainly invest in mortgages and generate a large part of their revenue from interest payments. Other than this, these REITs also lend money to proprietors and generate income in the form of interest accrued on the same.
Hybrid REITs: As the name suggests, these entities are a perfect combination of both equity and mortgage REITs. Their total revenue is generated from rentals as well as interest payments.

On the Basis of Shareholding Pattern

Private REITs: These REITs function like any other private entity, catering to a limited number of investors. Generally, private REITs are neither listed on the National Stock Exchange nor registered with SEBI.
Publicly-traded REITs: A publicly-traded REIT is an entity that extends shares that are enlisted on the National Stock Exchange and regulated by SEBI. Investors can purchase or sell shares through NSEs.
Public Non-traded REITs: These REITs are not listed on NSE but are registered with SEBI. They are generally preferred by investors as they are not subjected to market fluctuations.

Benefits of REITs

Offering a large number of benefits, real estate investment trusts have gained huge popularity among investors. Let’s explore a few key advantages of REITs:

Higher Capital Appreciation: As compared to other popular investment avenues, REITs typically offer better returns. In addition to that, their favourable tax structure is another reason for higher capital appreciation.
Easy Liquidity: Another main advantage of REIT investments is the considerable liquidity they offer. Since most REITs are listed on a national exchange, investors can easily buy and sell their shares.
Better Diversification: Since REITs follow market trends and are traded on stock exchanges, they are known to offer better diversification opportunities. If you’re looking for an option to diversify your portfolio, making an investment with REITs is a great option to consider.
Inflation hedging: REITs rely on rentals and interest payments for their revenue generation. Since the average rental rate and rate of interest also increase in tandem with inflation, REIT investments can serve as an effective hedge.

How to Invest in REITs?

If you’re planning to make an investment with a REIT, there are several listed REITs in India that you can choose from. All you need to do is check the list of relevant real estate investment trusts and buy their shares, just like you would for any other public stock. Although the process is quite simple, you can also consider seeking help from an investment advisor or financial planner. He/she will analyze your financial goals and recommend appropriate options. For example, if you are looking for plots for sale in Manali or planning to buy land in Chennai, your financial advisor will choose a REIT investment accordingly.