Direct commercial real estate vs REITs: Which is a better investment bet?
Investors looking to invest in the real estate market often compare REITs to commercial real estate. Corporations, known as REITs or Real Estate Investment Trusts, function similarly to mutual funds in real estate investing. you can invest in REITs without possessing or managing any property by yourself.
Wondering how to invest in Real Estate? Investors looking to invest in the real estate market often compare REITs to commercial real estate. Corporations, known as REITs or Real Estate Investment Trusts, function similarly to mutual funds in real estate investing. you can invest in REITs without possessing or managing any property by yourself. alternatively, you can invest directly in commercial real estate by purchasing homes or commercial properties.
Asma Javed, Vice President, in a Delhi-NCR real estate company said “Commercial real estate has always been a popular asset amid High Net Worth Individuals(HNIs) and institutional investors. While investing in commercial real estate offers high lease rentals, REITs on the other hand offer the investors the benefit of real estate investment along with dividend-based income and competitive market performance. Direct investment in commercial real estate can be risky contrary to the risk associated with REITs is comparatively low as it invests in a portfolio of real estate properties.”
“Many investors who want to tap into the real estate sector compare RIETs to actual real estate.REITs (Real Estate Investment Trusts)are corporations that act like mutual funds for real estate investment. you can invest in REIT without having to own or manage any property yourself. On the other hand, you can go for direct real estate investing by buying residential or commercial properties,” said Nakul Mathur, MD, Avanta India.
“With a direct/commercial real estate investment you can buy a specific property such as an apartment complex(residential) or a shopping center (commercial). Here investors make money through rental income, appreciations, and profits generated from any business activities that depend on real estate but REITs are a key consideration when constructing any equity or fixed income portfolio. They can provide added diversification, potentially higher total returns, and lower overall risk. In short, their ability to generate dividend income along with capital appreciation makes them an excellent counterbalance to stocks, bonds, and cash.REITs own or manage income-producing commercial real estate, whether in the properties themselves or the mortgages on those properties,” said Nakul Mathur, MD, Avanta India.
“Investing in commercial real estate is highly illiquid which means in case you need to dispose of the property it may take months or even years to do so. This points out that the investment might get stuck for a longer period than you expected. On the other hand, REITs are quite liquid as the units are traded on the stock exchange and you have the flexibility of partly selling your investment in case you want to do so. Thus there could be multiple aspects to both types of investments. An investment in real estate is in itself a substantial final decision and it would be a good idea to consult a real estate investment expert before going ahead,” said Asma Javed.
Hari Movva, Senior Vice President, SILA said “For non-institutional investors, who typically operate with a lower capital pool, investments in REITs are significantly more attractive than acquiring Direct Commercial Real Estate. The two key advantages offered by REITs are – Diversification and liquidity.”
Diversification – REITs typically own multiple assets and in certain cases across geographies. This offers diversification against underperformance or increased vacancies in any single asset/location.
Liquidity – Since REIT units are listed on stock exchanges they offer easy liquidity for investors when they are looking to exit.
Apart from the above, REITs also benefit from the advantages of scale. The relatively larger scale of REITs enables them to attract larger and better tenants and negotiate competitive rates with service providers such as brokers, leasing agents, property managers, etc, further added Hari Movva.
In a commercial real estate investment, you can purchase a specific property line residential apartment, or retail space. Here investors profit from real estate appreciation, rental income, and profits from any business that depends on the property. Investments in commercial real estate are suitable for those who prefer a more individualized experience and a sense of returns from purchasing, managing, and selling the property but REITs are a way for investors to diversify their holdings. Thus they are an option for investors seeking assets apart from stocks and bonds. Investors seeking a consistent income may find REITs more appealing as they pay regular dividends. investment in commercial real estate can fetch you assured rentals along with an interest-free security deposit. While the rental yield keeps on increasing in the long term, the monthly rent might increase or decrease as per the given market conditions. The annual lease rentals on commercial properties could be as high as 6-7%.
For example Avanta Business Centre. This UK based Managed office spaces brand offers unbranded, flexible office spaces in New Delhi and Gurgaon with advanced IT infrastructure. Their business centers are located in prominent business districts of Delhi/NCR offering high visibility and easy accessibility. They also provide professional meeting rooms and conference spaces in different sizes to suit one’s business needs. Avanta’s clients range from major international corporate businesses to large members of SMEs and sole traders wanting a single office.
Suren Goyal, Partner, RPS Group said “REIT is a corporation that owns, operates, or finances income-producing real estate or real estate assets. Modeled after mutual funds, REITs pool the capital of numerous investors. they offer a low-cost way to invest in the real estate market. you can invest in a fund for as little as $500-a much lower entry point than commercial real estate investing. another benefit of REIT is that it offers enticing total return potential. By law, REITs have to pay at least 90% of the taxable amount to the shareholders and it's not uncommon to have a 5%dividend yield or more.REITs have the potential for capital appreciation as the value of underlying assets increases.”
“Whereas one of the benefits of investing in commercial real estate is that it has the potential to generate substantial cash flow as well as the ability to take advantage of numerous tax breaks to offset the income. while the real estate market fluctuates as the stock market does, property prices generally increase with time, so you may be able to sell it later on at a higher price and of course, there's also the prospect of price appreciation,” Suren Goyal further added.
Most buyers of commercial real estate prefer to finance a home with a mortgage or a loan, as a result, some tax advantages are available. But REITs do not provide comparable tax advantages and even the dividend payments on REITs are taxed. In the case of ownership of property investors in REITs are not given the title of property ownership and they only receive trust units. On the contrary, commercial real estate grants investors the freedom to use the property as they deem worthy.
Both commercial real estate and REIT investment have their benefits. You may consider REITs for their decent returns, comparative safety, steady income, and the opportunity to diversify your portfolio with a lower investment amount. On the other hand, REITs are newer in the market and are traded in stock exchanges, this means there is a risk of value fluctuations and market dynamics. Additionally, the returns are lower than a direct investment in commercial real estate, while you do not have any control over the returns or performance, unlike direct real estate investment.REITs do offer higher liquidity and easier exits than what you can expect in commercial real estate investment. But commercial real estate will get more benefits from capital appreciation in the future. So for both investments analyze your financial situation and investment goals and take professional advice before investing.
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First Published:20 Mar 2023, 10:43 PM IST
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