Have just 2 lakh to invest? Invest it in a commercial property!
The real estate market is all set to witness is next stage of growth as the government has finally allowed REITs in India. REITs are investment vehicles which allow investors to pool-in small sum of money to buy properties. REITs functions as a mutual fund where an expert mobilizes fund from small investors and then parks them into various assets. A small investor with a capital of as low as a Rs. 2,00,000 can also invest in real estate through REITs. Currently a REIT is only allowed into the commercial space and 80% of the money needs to be invested in stable properties. What are the advantages of RIETs over direct buying in properties?
Small ticket size
REIT allows an investor to put in small sum of money to buy large properties, which can offer both a stable dividend and also price appreciations. However, in direct investing the minimum investment that one needs to make is a minimum of 30-40 lakhs, whereas with REITs you just need two lakhs to invest, thus REIT allows more people to participate in the real estate growth story.
Diversification of asset class
A golden rule in investing is diversification. REITs add diversification to your investment portfolio, which decreases your total risk. Real estate is considered to be one of the safest investment categories, but due to its high price it has always been out of reach for most individuals.
Diversification of properties invested
When we invest directly in a property, we are able to invest only in one or two properties. This means if something goes wrong then the entire money invested can be lost. On the other hand when a person invests in a REIT, the money is invested in multiple properties which act as an hedge against anything going wrong in a single property.
Real estate is an attractive investment opportunity. It’s one of the only asset class which has offered 25% growth over the last many years. However, selling a property in which you have directly invested can be a challenging task, specially in a downturn. But, this is not the same in a REIT, where you can exit the investment immediately by selling your units in a stock exchange where the REIT is listed.
REITs in India have to invest 80 percent of the capital mobilised into stable properties which have rental incomes. Also, REITs are structured in such a manner that 90% of all their income needs to be distributed as dividends. Thus, it allows for a continuous flow of dividend for the investors. Similarly, in a direct investing option one can have difficulties in looking for a tenant and can make the rental income erratic.
The biggest benefits of investing in REITs are the taxation benefits. In REITs we are exempted to pay capital gains tax (for investments of more than 3 years) and only 15% if it’s a short term gain. Also, the dividends are tax free in the hands of the investors as corporate gains tax is already paid.
Expertise in investing
Indian real estate market is full of hundreds of builders. Most of them are genuine and have all the necessary approvals before they start accepting money from owners. However, there are still many developers who would sell you substandard properties and that too at higher prices since an individual buyer as limited bargaining power. However, a REIT has an expertise of people who have been in the industry and who can differentiate from good from the bad. Thus, we are less likely to run through a bad investment.
Overall, REITs are a good development for the real estate market in India. It gives an opportunity to the small investors to invest in the Indian real estate market.