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REIT Investing: A Complete Guidance on real estate investment trust

REIT Investing: In April 2019, REIT investment was made available in the Indian market. REITs or real estate investment trust can be described as a company that owns and operates real estates to generate income. It is an investment strategy that works similarly to stocks, letting investors to combine their funds into a portfolio of investments. The asset, whether direct or indirect, will be real estate in this scenario. Traditionally, investments are done for equity.

With this, you won’t have to worry about the expense of buying real estate while still earning fantastic profits. You can invest in leased or rented properties such as hotels, shopping centers, offices, medical facilities, etc.

A sponsor, manager, and trustee make up the fundamental components of a REIT investment. The trustee controls the investments by overseeing the properties. Usually, all of the shareholders receive a dividend when real estate-related income is earned. A REIT has two options for owning its assets: directly or indirectly through a holding company, and SPV, or both.

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Holding company (Hold co):

It is a company or limited liability partnership where the REIT owns at least 50% of the stock. Later, the Hold co invests the same in an SPV. An SPV has the largest holding in a piece of real estate.

Special Purpose Vehicle (SPV):

A company is considered an SPV if it owns at least 80% of the equity directly in the real estate assets and is not permitted to make investments in other SPVs. An SPV’s ownership is at least 50% owned by the REIT or the holding company, respectively.

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What are the different types of REITs?

Mortgage REITs: As the name suggests, this system provides money to property owners through mortgages and loans. It goes without saying that they make money from the interest on these mortgages. Mortgage REIT investors typically gain more than equity REIT investors during periods of high interest rates.

Equity REITs: The most often used and generic type of REIT investing choice is this one. It is easy to comprehend because it mostly administers and manages commercial properties and makes money through rent.

Private REITs: These are not traded on the National Securities Exchange nor registered with SEBI. It is not a viable alternative for all investors because it is privately sold exclusively to a small number of chosen investors.

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Hybrid REITs: Due to this, investors can participate in equity and mortgage REITs simultaneously. Investors might benefit from both rent and interest income thanks to it. Due to its inherent diversity, hybrid REIT gives you an advantage over other investments.

Publicly traded REITs: As opposed to private REITs, they exist. National Securities Exchange is the market for publicly traded REITs, which are governed by SEBI. Similar to typical equity owners, investors can purchase and sell their shares.

Public non-traded REITs: These REITs are registered with SEBI but cannot be traded on National Securities Exchange. Hence, public non-traded REITs are not affected by any market fluctuations which makes them relatively stable.

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Differences between REITs and Real estate mutual funds?

  • Real estate mutual funds invest in the shares of a real estate company while REITs investing is directly in the property.
  • You will reap regular returns from a REIT but a real estate fund will give you higher returns
  • REITs are comparatively more liquid and flexible than real estate funds.
  • Real estate funds replicate traditional mutual funds whereas REITs follow a similar pattern as stocks and exchange-traded funds.

How does REIT work?

A sponsor: The sponsor is the person who creates the REIT. Typically, a builder or real estate firm is responsible. For the first three years, the sponsor is required to own a 25% ownership; beyond that time, that stake can be reduced to 15% of all REIT units.

A trustee: For the benefit of the investors, a trustee holds the assets and oversees the timely payment of dividends. The sponsor appoints a trustee who represents the interests of the unitholders.

A manager: The trustee appoints the manager, who is subsequently in charge of making all investment-related decisions. Typically, a private corporation serves as the REIT’s manager.

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