12 Things To Know About REITs Before Investing
REITs (Real Estate Investment Trusts) were launched in India five years ago. They allow investors to hold commercial property at a fraction of the cost.
Why does it matter?
- REITs lowered the entry barrier for retail investors to invest in commercial properties.
- It promised rental yields in the form of dividends.
- Capital appreciation is also possible. If the value of underlying assets (properties) increases, the price increases.
- REITs must mandatorily invest 80% of investors’ money in completed, income-generating commercial projects, thus addressing the issue of cash crunch and project delays.
- REITs must distribute 90% of their post-tax earnings as dividends to shareholders.
A word of caution
- Like mutual funds, REITs collect money from investors to buy income-producing assets. But, unlike mutual funds, the properties brought by REITs are not easily tradeable.
- The total market value of REITs is currently close to Rs 80,000 crore. However, they are not bought and sold frequently, which may lead to a liquidity issue.
- The taxation is currently complex, too.
- REITs decide when to distribute the dividends. Which means the dividends may be irregular.
What next?
- If you need regular income, consider allocating a small portion (around 8-10%) of your portfolio to REITs.
- Please do proper due diligence before investing – occupancy rate, tenant diversification, lease period, etc.
Since REITs are too young, volatile, and challenging to buy and sell, please look at other investment areas to achieve your long-term objectives/milestones.