REIT Is The True Alternate Asset Class

Read below the basic information on REITs:

REITs: An Investment Snapshot

REITs are alternative investments that entitle the investors to the rent-yielding properties’ underlying cash flow generation. Meaning they are more sophisticated than simply buying real estate assets for earning rent. These investments are more liquid than investing in actual real estate assets. This advantage of liquidity generally comes from their listed status.

REITs are SEBI (Securities and Exchange Board of India) registered alternative investments, and investors can publicly trade them on stock exchanges. Due to their listed status, some investors consider them dual-category investments rather than alternative investments. Moreover, REITs are one of the newer categories of alternative investments such as the InvITs (Infrastructure Investment Trusts).

REITs: Working And Investment Advantage

REITs are alternative assets that pool capital from investors to acquire and operate real estate properties such as office buildings, shopping centres, and apartment complexes. REITs can be compared to mutual fund investments where AMCs pool money and invest in a fund. Similarly, REITs too pool funds from numerous HNI and UHNI investors to invest in real estate assets. These properties generate rental income, which is distributed to shareholders as dividends. Investors of REITs invest in these investments in the form of units.

Real Estate Investment Trusts (REITs) offer a compelling investment vehicle providing several distinct advantages due to their unique structure and operational framework. Here are a few of them:

• Niche Investments: REITs are considered niche investments due to their specific focus on real estate. Understanding REITs requires knowledge of real estate markets, property types, and REIT structures. These investments can be more specialised than traditional real estate investments.
• Diversified Portfolio: Similar to retail investors, HNIs and UHNIs require portfolio diversification. REITs allow HNI and UHNI investors to spread their risk across various properties and sectors, reducing exposure to any single asset or market fluctuation.
• Professional Management: Unlike the physical purchase of real estate assets, REIT units are managed by experienced teams that handle property management, tenant relations, and financial oversight, relieving investors of these responsibilities. On the plus side is the advantage of relief from physically holding a real estate asset.
• Liquidity: REITs are traded on stock exchanges like NSE and BSE. With this feature, the investors have the flexibility to buy and sell them like shares at any point in time.
• Returns As Dividends: As per the current regulatory norms, REITs are required to distribute not less than 90% of their taxable income to shareholders, which can result in favourable tax treatment.

REITs: Key Considerations for Sophisticated Investors

• Tax On Dividend Income: Investors must consider dividend income from REITs as income from other sources for tax purposes. The eventual tax rate on the returns depends on their total taxable income and the tax slab they fall under.
• Short-Term Capital Gains: REIT units held for less than 36 months would result in short-term capital gains.
• Long-Term Capital Gains: Investors would have long-term capital gains for REIT units held for 36 months or more. Budget 2024 has removed the advantage of indexation benefits from all financial and non-financial investment products. Therefore, there are no indexation benefits for long-term REIT investing.
• Due Diligence: Investors should thoroughly research individual REITs to assess their financial performance, property portfolio, and management team.
• Risk Tolerance: Like other alternative investments, REITs are subject to market risks including economic downturns, interest rate changes, and property market fluctuations.

Conclusion

REITs can be niche avenues for discerning HNIs seeking to diversify their investment portfolios beyond traditional equities and bonds. Moreover, REITs provide a unique opportunity to invest in a diversified portfolio of real estate properties without the direct management burdens associated with owning individual real estate assets. Thus, REITs offer a dual-pronged approach to investment returns, combining regular dividend income with the potential for capital appreciation. Learn and navigate through REIT investments with the help of HDFC Tru wealth management platform.