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Reit

Key Takeaways

  1. A Real Estate Investment Trust (Reit) is a company that owns and operates income-generating real estate, which could be offices, warehouses, hotels, and apartment buildings.
  2. REITs are classified into two categories: Equity Reits and Mortgage Reits.
  3. According to Sebi’s regulations, Reits can distribute around 90 percent or more of their income as dividends to their shareholders. Shareholders are then taxed on these dividend earnings.

A Real Estate Investment Trust (Reit) is a company that owns and operates income-generating real estate, which could be offices, warehouses, hotels, and apartment buildings.

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The business model of a Reit is to lease or rent out properties and the income received is then distributed as dividend among shareholders.

A mortgage Reit provides finance to income-creating real estate and the interest earned by it is its income, redistributed as dividends.

According to Sebi’s regulations, Reits can distribute around 90 percent or more of their income as dividends to their shareholders. Shareholders are then taxed on these dividend earnings.

About REIT

REIT was established around the 1960s by congress in the US, to allow people to benefit from investing in income-producing real estate such as apartments, malls, warehouses, hotels, resorts, etc. The stockholder of REIT can earn a share of the income produced through real estate investment without having to go or buy or finance the property. Because of its diversified profile REIT offers many benefits.

Types of REITs

Equity REITs

Equity REITs consist of a wide range of real estate such as shops, offices, malls, hotels, apartments, etc. Equity REITs derive most of their revenue from rent on those properties.

Mortgage REITs

Mortgage REITs can finance both residential and commercial properties. They derive their revenue from interest earned from investments in mortgages or mortgage-backed securities.

Hybrid REITs

They use the investment strategies of both equity and mortgage REITs.

Publicly traded REITs

Individual investors can buy and sell shares of publicly-traded REITs that are listed on a national securities exchange.

Public Non-Traded REITs

Although they are SEC-registered REITs, they do not trade on regional stock exchanges. They are therefore less liquid than REITs that are traded openly.

Private REITs

These REITs are not listed on national securities exchanges and are typically sold to institutional investors.

Reits Regulations

  1. According to Sebi’s regulations, Reits can distribute around 90 percent or more of their income as dividends to their shareholders. Shareholders are then taxed on these dividend earnings.
  2. The company’s minimum asset base should be of Rs.500 crores.
  3. The company’s 80% of the investment should invest in revenue-generating properties. 
  4. If a company wants to invest in real estate, which is under construction, it should not be more than 10%. 

Advantages and Disadvantages of Reits

Through REITs, it is easier to invest in real estate. Sebi’s regulation to pay 90% or more dividend to shareholders, invokes investors to purchase REITs. Because of this regulation, management can not lower the dividend but can pay more, which assures the dividend payment. Reit provides higher liquidity than owning real estate. Because in case of financial needs, it is easier to liquidate REITs than a property, which generally takes time to find interested participants, and it takes time to complete a transaction. The chances of any fraud are less because it is regulated by Sebi.

But not always real estate prices go up, like what happened in the 2008 financial crisis. So while investing in Reit, investors should consider the growth of the industry. Sure, Reits diversify your portfolio, but it comes with some risks.