Home / Money / Personal Finance /  Reit, the bite-size option on your real estate menu

In terms of portfolio diversification, real estate is a great option to consider. But many are turning away from it due to falling rates and liquidity issues.

Now, if you don’t want a massive commitment of investing a huge chunk of money in real estate but still want to participate in the market, then the best way to do it is through real estate investment trusts (Reits) said Pankaj Kapoor, founder and managing director, Liases Foras.

“Depending on the size, the minimum investment in real estate can be around 50-60 lakh, but you can invest in the sector through Reits even with 2 lakh," he added.

Explaining what real estate investment trusts are, Anuj Puri, chairman, ANAROCK Group, said, just like mutual funds, Reits are investment vehicles that own, operate and manage a portfolio of income-generating properties for regular returns.

As of now, Reit-listed properties are largely commercial assets—primarily office spaces—that can generate steady and lucrative rental income. Reit-listed office assets are very likely to be followed by other Reitable asset classes in India, including retail malls, hotels, etc.

To ensure regular income to investors, it has been mandated to distribute at least 90% of the net distributable cash flows to the investors at least twice a year.

Currently, the yields from Reits are in the range of 8% to 9%, which is far better than any fixed deposit returns, said Kapoor.

However, though Reits are well established across the developed world, in India they are still nascent, and hence, the risk part is still unknown, said Harsh Roongta, founder, Fee Only Investment Advisers LLP, a Securities and Exchange Board of India (Sebi)-registered investment advisory firm.

So, the pertinent question to ask is, is it a prudent decision to invest in Reits at this stage?

While considering any sort of investment, one should consider three parameters: risk, return and liquidity, Roongta said. That way, it is too early to presume what kind of risk it might have in the future. “I’m not saying it is a bad risk, but it is yet to be known fully," he added.

For Reits, the returns aspect is also reasonably known, although they could change over time because rental contracts can be renegotiated.

The third part is liquidity. “Now, liquidity was an issue earlier. But once the Reits become part of the wide index, the liquidity factor will improve significantly, said Roongta.

Considering these factors, it can be easily said that in the coming times Reits can be considered an efficient financial tool even in India.

How are gains from Reits taxed?

Investors can get three types of income from Reits—capital gains earned from the sale of shares of SPVs (special purpose vehicles), interest from SPVs and dividend from SPVs, said Gautam Nayak, partner, CNK and Associates LLP.

And, here is how investors are supposed to pay taxes for the real estate investment trusts:

Dividend income

The dividend portion is taxable in the hands of the unitholder only when the SPVs paying the dividend to the Reit have opted for the concessional rate of tax of 22%. Otherwise, it is not taxable in the hands of the investor.

Capital gain

An investor has to hold Reits for three years for them to qualify as long-term capital assets, but the long-term capital gains that an investor may make on the sale of Reits are then taxed at only 10% without cost indexation.

Interest income

A unitholder has to pay tax on the interest income as per his/her tax slab. Further explaining the SPV, Nayak said Reit investments are generally not made directly by the trusts, but through SPVs (companies) through shares, interest-bearing loans or debt instruments.

Who should invest in Reits?

Reits are ideal for investors who want a steady income with minimum risks, hence, it is ideal for pensioners, said Puri. Second, Reits are a good investment option for investors who are looking to diversify their portfolio beyond gold and equity markets, he added.

How has the pandemic affected Reit investments?

Real estate, especially commercial spaces, took a huge hit during the pandemic, Kapoor pointed out. “The rental income came down and also the yields from Reits; so many people lost money," he said.

However, that was the first order effect, Roongta asserted, adding, “Once people start going back to office after vaccination, hopefully, things will improve."

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