Explained: Investing in REITs vs Physical Real Estate in India

Let us understand the nuances of this financial instrument

REITs or Real Estate Investment Trusts are a new asset class that has come into the Indian market which gives investors a chance to get exposure to real estate without incurring the huge cash outflow typically needed for physical properties (commercial or residential). 

What are REITs? 

A REIT is a financial instrument that invests the funds collected from multiple stakeholders into income-generating real estate properties. These properties may be commercial spaces such as office spaces, malls, hotels or even residential properties. One can draw parallels between a mutual fund and a REIT as they are both entities that pool money from investors to invest in the intending asset. 

REITs are mandated by SEBI to invest 80 per cent of the money into income or rent generating properties and also have to mandatorily distribute 90 per cent of its income to the unitholders in the form of dividends or interest income. 

REITs in India 

In India, at present, there are only three REITs, namely, Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust. These REITs have been duly registered and approved by SEBI and operate primarily in the space of commercial real estate, predominately office spaces. 

All three listed REITs in India have a strong presence in their respective regions of operations aided by favourable locations of their properties. For example, Embassy REIT is among the largest players in commercial properties in the Bengaluru region. It has properties in prime locations in the city. Similarly, in the case of Brookfield RIET, it has over 10 million square feet of income-generating commercial properties spread over the markets of Noida, Gurugram, Kolkatta, and Mumbai. 

Despite the recent Covid-19 uncertainties, the listed REITS in India have continued to pay their regular interest and dividend income each quarter. For instance, the Brookfield REIT paid Rs 6 per unit to its unitholders in the June quarter. In the September quarter, the REIT generated a net distributable cash flow of Rs 190 crore or Rs 6.43 per unit.

REITs vs Physical real estate 

Investing in REITs offer a lot of benefits to investors as compared to investing in physical real estate. Apart from the huge cash outlay required for investing in physical real estate, finding the right property for investment is always a tall task and involves hours of research and multiple property visits. There is also the legal and other paperwork involved in purchasing physical real estate and the maintenance costs, property tax, water tax, cost of registration, etc. Liquidity is also another factor that does not work in the favour of physical real estate. 

While owning your own home cannot be replaced by investing in REITs, any investment in physical real estate apart from this can be conveniently replaced by REITs given the obvious benefits. Investors are able to put their money into “Grade A” office space commercial properties without incurring huge cash flow requirements and make money in the form of dividends and enjoy capital appreciation.