Buying property is expensive and often out of reach for most investors, but a real estate investment trust (REIT) offers a way to own a slice of income-generating property without purchasing it outright.A real estate investment trust (REIT) is an investment instrument modelled on mutual funds. Just as a mutual fund company pools investors’ money to create a portfolio of securities, a REIT enables people to invest in income-generating properties that are owned by a trust and managed by a company, according to an ET report .These properties can be residential or commercial, with income generated either through rent or from capital gains on property sales. The proceeds are distributed among investors in the form of dividends, interest, or capital repayment. Investors are issued units — similar to mutual fund units — which can be redeemed as desired. In India, REITs can be listed and traded on stock exchanges and are regulated by the market regulator, Securities and Exchange Board of India (Sebi).Benefits of investing in REITs
- Accessibility: REITs allow investors to put in smaller amounts and acquire fractional ownership of properties, removing the high entry barrier of direct real estate purchase.
- Liquidity: Being exchange-listed, REIT units can be easily bought or sold, unlike physical real estate, which is illiquid and cumbersome to transact.
- Transparency: As Sebi governs REITs, investors have access to detailed financial disclosures.
- Diversification: Investors can gain exposure to multiple property types through fractional ownership in a single REIT.
- Steady income: REITs are required to distribute as much as 90% of their income to shareholders, making them a potential source of regular payouts.
Limitations and risks of REITs
- Market risks: Economic cycles and property market fluctuations can impact rental income and property valuations.
- Taxability: Dividends are added to the investor’s income and taxed at slab rates. Short-term capital gains — for holdings under one year — are taxed at 20%. Long-term gains — for holdings over one year — are taxed at 12.5% for profits exceeding Rs 1.25 lakh per year.
- Interest rate sensitivity: Rising interest rates can increase borrowing costs and EMIs, potentially reducing REIT profitability.
REITs offer a blend of real estate exposure and the accessibility of mutual funds, providing liquidity, diversification, and income potential. However, they also carry exposure to market fluctuations, tax implications, and interest rate changes — factors investors must weigh before investing.
