REIT way, the good way ? The Good way

Real estate, a prominent constituent of the majority of investment portfolios, holds a significant position as an investment avenue. The predominant composition of the portfolio primarily consists of residential properties and land holdings.

Within select investment portfolios, it is not uncommon to encounter commercial real estate assets, encompassing a diverse range of properties including retail establishments, office spaces, and exhibition halls. Nevertheless, it is important to note that the scale of commercial properties predominantly owned by individuals tends to be relatively modest, thereby limiting their appeal to larger corporate entities.

Commercial properties often offer more lucrative rental opportunities compared to residential properties, although they typically fall short of the premium commercial properties that are sought after by large corporations for their offices and showrooms. Large corporations require expansive office spaces spanning tens of thousands, and in some cases, even millions of square feet. The acquisition of such properties, which may entail costs reaching tens or even hundreds of crores, will likely be beyond the financial means of individual investors. In the event that prospective buyers are able to successfully complete their purchase, it becomes imperative for them to identify suitable corporate entities interested in leasing their acquired property, as well as effectively managing said property. The arduous undertaking of discerning lucrative real estate, procuring reliable lessees, and effectively overseeing property operations poses considerable challenges for individual investors.

Real Estate Investment Trusts (REITs) play a pivotal role in the realm of financial investments. Real Estate Investment Trusts (REITs) are financial vehicles that strategically allocate capital towards premium real estate assets. Real Estate Investment Trusts (REITs) allocate their investments towards a diverse range of properties, encompassing various sectors such as commercial real estate, retail spaces, healthcare units, data centres, apartment complexes, and more. Investors have the opportunity to acquire units in these Real Estate Investment Trusts (REITs) and actively partake in their prosperous trajectory.

Real Estate Investment Trusts (REITs) strive to provide consistent income distributions to their unitholders, which are derived from the rental revenues they generate. Furthermore, it is worth noting that the underlying assets have the potential to appreciate in value, thereby providing potential capital gains for investors.

Structure

The three-tiered structure of Indian REITs is similar to that of a mutual fund. A Trust will hold the properties directly in a business or through a Special Purpose Vehicle (SPV), a Sponsor, who is often a real estate developer, and an Asset Manager, who takes decisions about the properties to be bought or sold, tenants, and rental agreements, among other things.

The asset manager is also accountable for following all applicable REIT rules, allocating surpluses, and completing required reporting. To make sure that the property is maintained and well-cared for, the asset manager may employ a property manager for facilities management.

In the first three years and for the following three years and beyond, the sponsor must own 25% or more of the REIT.

In India, at least 80% of the properties held by REITs must be finished businesses that may be rented out. The remainder may consist of additional investments or properties that are being built. A REIT must distribute to unit holders at least 90% of the income it generates.

Taxation?

The taxation of Real Estate Investment Trusts (REITs) can be characterised as intricate and multifaceted. The taxation of income is contingent upon the origin of the funds being disbursed.

In the realm of real estate investment, it is worth noting that a dividend disbursed by a Real Estate Investment Trust (REIT) or its Special Purpose Vehicle (SPV) holds a distinct advantage in terms of taxation. Specifically, this dividend remains exempt from taxation, provided that the REIT or SPV refrains from asserting any exceptional tax privileges.

Income from rental properties or interest payments received by investors is included in their overall income and subject to taxation at their respective tax brackets.

The taxability of loan repayment is contingent upon the cumulative distribution remaining below the issue price threshold. In the event that the value of an asset surpasses its initial offering price within a given fiscal year, it shall be subject to taxation as part of the individual's income for that specific period.

Upon the sale of the units, it is imperative to note that they shall be subjected to the taxation of capital gains. The prevailing rate for short-term capital gains tax stands at 15 percent, applicable for a duration of up to 36 months. Following a period of 36 months, the gains acquired from long-term investments become subject to the imposition of capital gains tax. This tax is levied at a rate of 10 percent, applicable beyond the initial threshold of Rs 1 lakh.

Worth the hype ?

Real Estate Investment Trusts (REITs) have emerged as a novel investment avenue, presenting a compelling opportunity for discerning investors. This innovative approach offers an opportunity for ordinary investors to partake in the realm of commercial real estate, traditionally inaccessible to them. Therefore, the inclusion of real estate investment trusts (REITs) in one's investment portfolio enables retail investors to gain exposure to premium real estate assets that would otherwise be inaccessible to them.

This particular financial instrument lies within the realm of hybrid securities, exhibiting characteristics that position it between equity and debt products. Real Estate Investment Trusts (REITs) provide investors with a consistent stream of income, akin to that of a debt instrument. The majority of the distributions are facilitated via dividends, which possess the advantageous quality of being exempt from taxation. Taxability of various distributions can be contingent upon the origin of said distribution. Real Estate Investment Trusts (REITs) possess the inherent capacity to yield annual returns ranging from 6 to 7 percent.

Over the course of time, the underlying property has the potential to experience appreciation, thereby manifesting itself in the Net Asset Value (NAV). The capital appreciation exhibited by this investment imparts a resemblance to equity, thereby augmenting potential returns.

Introducing a novel investment opportunity for Indian investors, one that holds the promise of portfolio diversification and potentially superior returns in comparison to conventional debt instruments.