Real estate investment has been blooming over the past years. And when compared to other investment alternatives REITs have been proven to be the most supreme form of all the investment options.
Keeping in mind, investing in real estate deals with a lot of money, therefore, it’s necessary to be extra careful and well knowledge about the trust that you will be investing in.
What is REITs?
REIT (Real Estate Investment Trusts) is one of the newest ideal approaches to getting positive exposure in the real estate market. It is a kind of organised company that invests in producing income through industrial and commercial real estate by purchasing mortgages or buying properties. Properties like apartments, shopping malls, office buildings, other infrastructure, healthcare units, etc.
The first REIT was introduced in the Indian market, in 2019 by forming Embassy Park REIT which is known to be India’s first publicly traded REIT. Here investors can invest to generate a share of the earnings they produce through the commercial estate, without any hurdles.
Types of REITs
- Equity REITs: Equity REITs are the popular type of REIT investment that possesses and handles income-producing properties. Simply put, all the source of income is generated through the rents invested in the commercial properties.
- mREITs: It is also known as mortgage REITs. Here the owners and managers of the real estate are financially backed-up directly by mortgages and loans. And from the interest received on mortgages, they produce their income. More than the equity REIT the mortgage REIT tends to benefit more if the received interest is high.
- Hybrid REITs.
Hybrid REITs are the composition of both equity REITs and mREITs. This means the investors can invest in both the REITs in order to generate income through rents and interests as well, these help the investors to expand their portfolios of real estate business.
- Private REITs.
Private REITs are the types of REITs, that are not registered with the terms of SEBI and also not traded on the National Securities Exchange. It is privately handled and sold to only particular small inventory investors.
- Public Traded REITs.
Public traded REITs are opposite to private REITs. These are the type of trust investments that are registered with SEBI and are traded on the National Securities Exchange. Like the regular equity shareholders, here the investors can also buy and sell their shares.
- Public Non-Traded REITs: The other type of REIT, Public non-traded REITs, these types of REITs don’t allow to be traded on the National Securities Exchange but are registered with SEBI. These types of REITs are immune to market fluctuations that enable them to be stable.
How do REITs work?
It is important to know that REITs are formed on long-term capital growth with steady dividend income. And to be noted, historically, a good amount of total returns have been produced by REITs. They are known to be the best portfolio diversifier because of their low correlation compared to other assets, which decreases the risk of the portfolio and increases returns.
The conventional way of investments basically dealt with equity but in the case of REITs, the assessment dealt with investment in real estate.
The primary structure of a REIT consists of a sponsor, a manager and a trustee who manages the properties by regulating the investments. The income generated by real estate is distributed among all the shareholders as a dividend. REIT owns its holdings directly through an SPV ( Special Purpose Vehicle).
The sponsors are the one who forms the REITs and has to hold a stake of 25% for the first three years and later on can be decreed to 15% of the total units of REITs. Generally, the sponsors are the builders or real estate companies.
The sponsor is the one who appoints a trustee who works in the interest of the unit holders. On behalf of the investors’ the trustee is the one who holds the assets and makes sure that the dividends acquired are paid on time.
The manager is the one who takes the responsibility of preparing all the decisions related to investment. A manager is appointed by the trustee. Most private companies are the ones who act as managers for REITs.
Conclusion on REIT
We will find various ways of investing, and REIT is one of them. It is a successful initiative taken but not everyone will abide by REIT. It is one of the best single branches put forward out of multiple investment opportunities and is necessary for everyone to have a broader knowledge of investment portfolios and select the best as preferred.