Namaste,
Real estate is something every Indian understands
well and like Gold, that Attachment for AT LEAST 1 OWN HOUSE (EK GHAR TOH CHAHIYE) is at the zenith of every
Indian's heart.
And REITs seem to be a good alternative for
those who cannot afford to invest big time in Real Estate.
Buying a REIT is the most transparent way to own Real Estate for a Lay Man.
WHAT IS REIT?
Real Estate Investment Trust, is more popularly known as REITs.
It is similar to Mutual Funds wherein the money is pooled and invested
in Commercial Real Estate Assets with the intention to
generate FIXED INCOME through monthly rent to be received from Tenants.
REITs earn rental income from their properties, which is distributed to the
Unitholders. So, while MF invests in Stocks, gold, bonds, etc, the
underlying asset in REITs gets invested in actual physical Real Estate.
Exactly similar to a Mutual Fund, REIT too will have
a Sponsor which establishes a Trust.
Since the earning is from RENT, which can be
monthly, quarterly, Half Yearly, or even Yearly, REITS pay, typically, dividends
on a Half-Yearly basis.
SO, HOW EXACTLY DOES A REIT WORK :
1. A REIT (like a Mutual fund) collects money
from Investors.
2. These monies are invested across Rent
Generating Properties.
3. The REIT collects the Rent
4. The REIT distributes the Rent to Investors
via periodical Dividends.
5. The Capital Appreciation (of the Property
owned by REIT) is reflected in the NAV
Regulations in India mandate that these REITs have to pay out 90% of the
distributable Cash Flows to the unitholders.
And REITs are supposed to have a minimum 80% in COMPLETED AND
INCOME GENERATING real estate properties.
So, REITs allow lay investors to have exposure to High-Quality Rent
Yielding properties that would otherwise be unaffordable.
Yes, REITs are also listed in Stock Markets and traded like any other
Equity Shares and hence have no liquidity issues which a typical Real Estate
will face.
SEBI came out with a list of DOs and DONTs for REITs way
back in 2014 and in the US, REITs are in vogue for quite a long time and more than
300 are registered and about 40,000 Commerical Properties in the US are owned
by REITs !!
In July 2020, Mindspace Business Parks came to the public to collect money for their
REITs.
This was the 2nd REIT issue to hit the Indian Markets after Embassy Office
Parks.
Later, Brookfield came out making it 3 REITs in India which are listed and can be traded.
BENEFITS OF INVESTING IN REITs
1.
Owning Real Estate is a challenge both
financially and in legal hassles, REITS is an easy simplified asset class to own
the same without owning it Physically.
2. No Lock-In
You as an Investor can enter or exit the REIT as
per your wish and convenience, unlike an actual Real Estate which has its own
problems. You can even sell the REITs in the Stock Markets making it very very
liquid. The REITs will be listed on both the NSE AND BSE
3. the Best way to have exposure to Real Estate. Affordable as you can buy a
fraction of the property by buying just a few units
4. In addition to the Dividend returns, there is scope for Capital
Appreciation which will be captured in the price of the listed unit of the
REIT.
5 . Since REITs are mandated to
distribute 90% of the surplus distributable Cash Flow, in form of dividends
there is a good scope for Regular Income.
6. Real Estate is one of the Most non-transparent asset classes and REIT aims to
reduce that as it is regulated by SEBI and will be managed by Professional
Managers (just like Mutual Funds)
7. DEBT ALTERNATIVE
A good alternative to Fixed Deposits and Bonds
as the returns in REITS are more or less assured due to regular rents.
7. GEOGRAPHICAL DIVERSIFICATION TOO:
Since REITs will be investing in Different Geographical locations and mostly in
Rental generating assets, it offers Investors a Good Diversification Option.
WHAT’S NOT GOOD :
1. Typical Real Estate Industry Issues like a
Bear Market could affect Capital gains
3. The Average Rental Yield is not very attractive in India at present (at
about 5% to 8%).
4. Since REITs are listed in the stock markets, the demand/supply mechanism
could affect the price of the listed entity and it could be quite volatile.
They are not steady and flat. NO Sir!
And Short-term performance could be awful.
In fact, in the US, Dow Jones REIT Index fell 17% in 2007 and 39% in 2008 though recovered subsequently!
TAX ANGLE :
1. Dividends were supposed to be TAXED IN THE HANDS OF THE INVESTORS
but later a change in the Finance Bill 2020 was announced post covid outbreak
wherein DIVIDENDS EARNED FROM REITs WILL BE EXEMPT IN THE HANDS OF THE
UNITHOLDERS.
Thus, The
dividends received from REIT are tax-free.
2. Short Term Tax (sold within 3 years) is 15% of Gains
3. Long-term tax (sold AFTER 3 years) will be at 10% of Gains.
4. Dividends received will be ADDED TO THE INCOME OF INVESTOR AND SHALL BE
CHARGED TO TAXED AS INTEREST INCOME
Point No.
1 The amendment, however, clarifies that the DDT exemption will be given
only for the companies which have not migrated to the new corporate tax regime.
The
dividend portion of the income from REIT being non-taxable lends a significant
advantage to a retail investor.
SHOULD YOU INVEST?
Please note that REIT is NOT Real Estate.
It is also not to be considered as an alternative to Real Estate.
Investing in REIT is like investing in a combo of Equity and
Fixed income.
Though it has more or less a stable return in form of regular dividends,
it also has price volatility in stock markets too.
In fact, in the US, the REITs have been MORE CONSISTENT in
delivering top performance than even the S&P 500.
The records show that in the US and other developed markets, investors
invest in REITs not to beat the Stock Market but for regular income as
by Law, REITs have to mandatorily payout at least 90% of their net earnings as
Dividends.
REITs, although listed, do not always move in the same direction as the
stock market as the underlying asset is Commercial Real Estate and thus
provides Good Diversification.
Investors should consider looking at REITS only if they
have a time frame of 5-7 year plus and more as a Diversification tool.
Regards & All the best,
Srikanth Matrubai,
Wealth Architect,
SRIKAVI WEALTH
Srikanth Matrubai Author of the Amazon Best Seller DON'T
RETIRE RICH
Do read the book and give your valuable feedback and request you to post
positive comments on
You are strongly encouraged to consult your financial planner before taking any
decision regarding this investment.
The views expressed here is the authors personal views and should not be
interpreted as a recommendation to invest/avoid.
All the best,
Regards,
Srikanth Matrubai
https://t.me/joinchat/AAAAAELl4KUnaJzi-JJlDg/
LETS LOOK DEEPER INTO THIS
In India, REITs often own property assets indirectly through Special Purpose Vehicles (SPVs). These SPVs contribute to the REIT’s income by paying out their own income (from rent and other sources) to the REIT as dividends. If any part of the distribution you receive from your REIT is in the form of a dividend, then it may be taxed in two ways:
- If the SPVs from which the REIT receives dividends have not opted for the new concessional regime (under section 115BAA) on corporate tax, then your dividend from the REIT will be tax-free.
- If the SPVs from which the REIT receives dividends are paying a lower rate of corporate tax at 22% instead of the standard rate, then you will pay tax on dividend from the REIT at your income tax slab rate.
To decide whether the dividend part of your REIT’s distribution is taxable therefore, you will need to find out if the SPVs of the REIT have opted for the concessional tax regime. Most REITs, thankfully, provide this disclosure in their investor relations section. Both Embassy and Mindspace REIT have clarified that their SPVs have NOT opted for the concessional corporate tax regime. Therefore, the dividend part of their distributions is tax-free in your hands. The above tax changes were brought in, in the 2020 budget when the Dividend Distribution Tax regime for companies and business trusts was done away with, and replaced by a system that taxed dividends in the shareholders’ hands
.Taken from the PRIME INVESTOR website which has clearly clarified about the dividends on REITs
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