Types of Real Estate Investment Trusts (REITs)

Explore the different types of Real Estate Investment Trusts (REITs) for diversified investments.
Types of REITs
4 min
10-October-2024
In recent years, Real Estate Investment Trusts (REITs) have emerged as a popular investment option in India, offering investors an opportunity to gain exposure to real estate without owning physical property. REITs are companies that own, operate, or finance income-producing real estate across a range of property sectors. Investing in REITs allows you to benefit from real estate investment while enjoying the liquidity of trading in stock exchanges. This article will explain the different types of REITs available, their advantages, and how you can invest in them.

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5 types of Real Estate Investment Trusts (REITs)

There are five main types of REITs, each offering different investment strategies and opportunities. Understanding these options will help you decide which type of REIT is most suitable for your financial goals.

1. Private REITs

Private REITs are not traded on public stock exchanges and are usually offered to a limited number of accredited investors. These REITs are not required to register with the Securities and Exchange Board of India (SEBI), making them less regulated than publicly traded REITs. While they offer potentially higher returns, they also carry greater risk due to lower liquidity and less transparency.

Key features of private REITs:

Not publicly traded, leading to lower liquidity.

Higher entry thresholds, typically catering to institutional and high-net-worth investors.

Returns are not always transparent, and there is less regulatory oversight.

2. Publicly traded REITs

Publicly traded REITs are listed on stock exchanges like the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). These REITs are regulated by SEBI, ensuring a higher level of transparency and governance. Publicly traded REITs are available to individual investors, offering them an easy way to invest in real estate through a simple stock purchase.

Key features of publicly traded REITs:

  • Listed on stock exchanges, providing liquidity and ease of access.
  • Available to all investors, including retail investors.
  • Regulated by SEBI, ensuring transparency and compliance.

3. Equity REITs

Equity REITs own and operate income-generating real estate properties. These include commercial properties like shopping malls, office spaces, residential buildings, and hotels. Investors in equity REITs earn income primarily through rents collected from tenants, as well as from the appreciation of the real estate held by the REIT.

Key features of equity REITs:

  • Primarily generate income through rent from properties.
  • Focus on commercial and residential real estate.
  • Provide stable, regular dividend income to investors.
  • Potential for property value appreciation over time.

4. Mortgage REITs

Mortgage REITs (mREITs) do not directly own real estate properties. Instead, they invest in real estate loans or mortgages, earning revenue through the interest on these loans. Mortgage REITs are more sensitive to changes in interest rates, making them a riskier option compared to equity REITs. However, they can offer higher returns due to the nature of the lending business.

Key features of mortgage REITs:

  • Generate income through interest on mortgage loans.
  • Highly sensitive to fluctuations in interest rates.
  • Riskier compared to equity REITs but offer potentially higher returns.

5. Hybrid REITs

Hybrid REITs combine elements of both equity REITs and mortgage REITs. They invest in both physical properties and mortgage loans, offering investors the opportunity to benefit from rental income and interest earnings. Hybrid REITs provide a diversified investment strategy but come with a mix of risks from both equity and mortgage sectors.

Key features of hybrid REITs:

  • Diversified portfolio that includes both properties and mortgage loans.
  • Offer a blend of rental income and interest earnings.
  • Risk levels vary based on the allocation between property and mortgage investments.
Limitations of Real Estate Investment Trusts (REITs)

While REITs provide attractive opportunities for investors, there are certain limitations that must be considered before investing.

LimitationExplanation
Interest rate sensitivityREITs, especially mortgage REITs, are highly sensitive to changes in interest rates, which can impact returns.
Limited capital appreciationCompared to direct real estate investment, REITs often provide limited capital appreciation as they distribute most of their income as dividends.
Market volatilityPublicly traded REITs are subject to stock market volatility, which can cause fluctuations in their share prices.


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Advantages of Real Estate Investment Trusts (REITs)

Despite their limitations, REITs offer numerous advantages that make them an attractive investment option for individuals looking to diversify their portfolio. Some key benefits include:

  1. Regular income: REITs are required to distribute at least 90% of their taxable income as dividends to investors, providing a reliable income stream.
  2. Diversification: Investing in REITs allows you to diversify your portfolio by adding real estate without the need to buy physical property.
  3. Liquidity: Publicly traded REITs offer liquidity as they can be easily bought and sold on stock exchanges, unlike physical real estate.
  4. Professional management: REITs are managed by experienced professionals, giving investors access to expert real estate management without the need for direct involvement.
  5. Tax benefits: In India, REITs enjoy certain tax benefits, including exemptions on dividend income, making them a tax-efficient investment option.
How to invest in REITs

Investing in REITs in India is straightforward, especially for publicly traded REITs. Here is how you can start:

  1. Through stock exchanges: You can purchase publicly traded REITs on stock exchanges like BSE and NSE using your Demat account, just like buying shares of a company.
  2. Through mutual funds: Some mutual funds invest in REITs, allowing you to gain exposure to real estate through a diversified portfolio.
  3. Through Real Estate Investment Funds (REIFs): These funds are designed specifically for real estate investments and may include REITs as part of their portfolio.
Are Real Estate Investment Trusts good investments?

Yes, Real Estate Investment Trusts (REITs) can be a good investment, especially for investors looking for regular income and portfolio diversification. They offer an accessible and liquid way to invest in real estate without the hassle of managing properties. However, REITs may not offer the same capital appreciation as owning physical property, and their sensitivity to interest rates can add an element of risk.

Investors should consider their investment goals, risk tolerance, and time horizon before investing in REITs. If you are looking for regular dividends, a diversified portfolio, and liquidity, REITs could be a valuable addition to your investment strategy.

Conclusion

REITs offer an excellent way to invest in real estate without owning physical property. With options like private REITs, publicly traded REITs, equity REITs, mortgage REITs, and hybrid REITs, investors have a wide range of choices to match their financial goals. While REITs offer benefits like regular income, diversification, and liquidity, they also come with limitations, such as sensitivity to interest rates and limited capital appreciation. Before investing, it is essential to understand the different types of REITs and evaluate whether they align with your financial objectives. With professional management and a straightforward investment process, REITs can be a great addition to your portfolio.

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Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or referhttps://www.bajajfinserv.in/fixed-deposit-archivesThe company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

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