Real Estate Investment Trusts 101
REITs will soon be listed on the Indian stock exchanges, giving retail investors a chance to include Real Estate in their asset portfolios
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Anyone who has read about real estate in India over the past couple of years has likely come across the terms REITs. REIT stands for Real Investment Trust. To understand what REITs are, one needs to understand how institutional investors make their investments in the real estate sector.
Institutional investors typically make investments through one of the following investment methods:
» Traditional Real Estate Private Equity - Direct Investments into Projects
» Investments into Private or Publicly Traded Development Companies
» Investments in yield generating Real Estate Investment Trusts (REITs)
» Real Estate Mutual Funds (served as kind of a proxy to REITs in India until the REIT legislation opened out)
Regardless of which aforementi8o9oned method they use; institutional equity investors need to pick a strategy depending on their risk vs return profile.
Simply put, REITs are securities that are traded on stock exchanges. For someone new to investing, a REIT works like a mutual fund. The underlying asset in the REIT is real estate, such as a building or commercial property, whereas the underlying asset for a mutual fund is the share of a company. REITs use the money that is collected from investors to buy real estate instead of using it to buy bonds or shares of company. Just like a mutual fund, which receives periodic dividends from its owned companies, a REIT receives rental income (referred to as yield) from the operations/leasing of asset or development.
One major attraction of REITs – they get special dividend distribution tax benefits in most countries. In many countries REITs pay out close to 90 percent of their profits to investors as dividends and qualify for special tax considerations on the dividend distribution.
Once a REIT is listed on a public stock exchange, it allows any size or type of investor to invest in real estate by buying units of the REIT. Small investors, who typically cannot afford to invest in expensive yield generating real assets can indirectly invest in them via REIT structures. For developers, REITs provide another avenue to raise funds for projects.
REITs typically follow a specific asset strategy and are classified accordingly.
Trustees
Trustees are responsible for taking custody of the assets owned by the REIT and its unit holders. They typically ensure that legal compliances related to the asset are in order and that the rights of the unit holders stand protected. Trustees are appointed and paid a fee for their duties.
The profit a from a REIT = The income generated from renting out the underlying assets less (-) the cost of operating all the assets for during a given period.
The costs typically include those of running the facilities, utilities, leasing, marketing, the fees paid to the REIT Managers and to the Trustees.
REITs will soon be listed on the Indian stock exchanges, giving retail investors a chance to include Real Estate in their asset portfolios.