India’s economy has gone through some fluctuations over the past number of years. But it’s beginning to get out of its most recent slump, especially in the real estate market where rapid growth is starting to take a firm hold.
According to the India Brand Equity Foundation, the Indian real estate market has turned into one of the largest globally recognized sectors. Compared to many other global real estate markets, it’s also one of the fastest growing. Additionally, India is currently ranked third in the world in land area that is LEED (Leadership in Energy and Environmental Design) –certified, with close to 12 million square miles of eco-friendly space.
A good deal of the current real estate growth is connected to the heavy development in a number of sectors including retail, hospitality and entertainment, economic services, and information technology services. The entire Indian real estate market is expected to reach US$180 billion by 2020. A recent development that has become an important factor in the future growth of the real estate market is the Indian government’s authorization for foreign REITs to invest in the country.
What is a REIT?
REIT is an acronym for Real Estate Investment Trust. According to a report released by EY in collaboration with the Federation of Indian Chambers of Commerce and Industry, REITs are real estate investment companies that act like regular stocks in that they offer common shares to the public. But they have two unique characteristics; the majority of their profits must be distributed to stockholders as dividends and they exclusively manage income-producing properties. The FICCI/EY report lists four categories of REITs:
- Equity – These REITs deal with direct ownership of property and their income is largely based on collecting rents.
- Mortgage – Aptly named, these REITs exclusively handle property mortgages. But they don’t just purchase existing mortgages and mortgage-backed securities, they also provide loans to property owners for mortgages. A large fraction of their revenue comes from the interest generated on mortgage loans.
- Hybrid – Hybrid REITs are a combination of the previous two. They invest in mortgages and properties.
- Sector-specific – Unlike the previous three, which generally deal across a wide range of real estate sectors, these REITs focus on particular kinds of property. The FICCI/EY report lists three sub-categories under sector-specific REITs.
- Housing – Receiving the vast bulk of their revenues from leasing their holdings, housing REITs purchase residential property for long-term holding. They usually control a diverse range of residential properties that they lease, manage, and renovate when needed.
- Industrial – Industrial properties like warehouses, manufacturing centers, and undeveloped land are what these REITs look for. They generally own properties across an extremely diverse range of businesses and professions.
- Hotel – These REITs deal with all sorts of different hospitality properties such as, hotels, resorts, conferences centers, and certain airport properties. Generally, the majority of their revenue is generated through the direct income provided by their properties.
Benefits of REITs
REITs provide a number of benefits over investing privately on your own. Money Control lists four particular benefits REITs can provide investors. The first is that they provide an excellent route for diversifying your portfolio. Buying into a REIT can give you the opportunity to invest in large scale real estate that would be far beyond your reach normally. REITs are also excellent if you’re looking for more consistent and relatively immediate financial gain because they are required to distribute the majority of their revenue as dividends. The portion of revenue that goes into dividends is commonly around 80 percent globally and 90 percent in India. There is also almost always a cap on debt-to-asset ratios which help to reduce risk.
The final major benefit Money Control discusses is the reduced volatility and increased transparency REITs give real estate markets. They do this through releasing information about average rents, tenant profiles, occupancy levels, and more on a semi-regular basis in order to reduce information asymmetry, which many claim is responsible for market volatility.
Not all aspects of REITs and their taxation have been entirely worked out by the Indian government. And most discussions will deal with aspects that affect foreign investors. However, there is good news about REITs and taxation; the dividends distributed to stockholders will be exempt from tax, as will any interest accumulated by the REIT, according to Mondaq. There is a lot more information about REITs and tax than there is space on this page, so go do some research to learn more.
REITs and You
So it seems that REITs will do a lot of good for the Indian real estate market and economy. But what about you? For one thing, investing in a REIT is very accessible. HBJ Capital states the minimum investment is only Rs.2 Lakh. Additionally, many of the management and due diligence tasks required when investing in property are dealt with my the REIT itself, so you’re free from any responsibility in those regards. Plus, with around 90 percent of revenue going to dividends, you’ll receive money on a regular basis throughout the year.
The diversity a REIT can give your investment portfolio is excellent, and you can use the income from your dividends to search for additional property from sources like Unitech Group to further diversify your assets.