REAL ESTATE INVESTMENT FOR BEGINNERS- IS REAL ESTATE INVESTMENT TRUST (REIT) THE BEST OPTION?: MOLLSHREE PAREEK
“Real
estate cannot be lost or stolen, nor can it be carried away. Purchased with common
sense, paid for in full, and managed with reasonable care. It is about the
safest in the world”.[1]
- Franklin
D. Roosevelt (American President)
“SECURED FUTURE” is
the desire of every individual. It goes without saying that every person
strives to earn a decent livelihood, and wishes to get engaged in such
activities which yield maximum profit and income. Investment is one of those
activities which not only secures the present, but also future financial
stability. Investment in simple terms can be defined as the allocation and
utilization of money in such a manner that it results/yields higher economic
returns (profits/income). An individual can invest in varied forms. However, in
the contemporary times the most propitious investment is real estate investment.
There are many ways to invest in real estate and Real Estate Investment Trusts
are one of those forms of investment.
REAL ESTATE INVESTMENT- A
BRIEF INTRODUCTION:
Real
estate investment refers to the purchase/buying, ownership and management of
property as an investment to generate income and profit. In order to earn
income via real estate investment one has a number of options, one of those
options is REITs.[2]
REAL ESTATE INVESTMENT
TRUST (REIT)- MEANING AND ANALYSIS:
Meaning of REIT:
Real
Estate Investment Trust is a company which owns assets such as buildings, land
and real estate securities. These trusts raise money from numerous investors
and in turn provide them with an access to real estate. The Real Estate
Investment Trusts are governed by REIT Regulations, notified by the Securities
Exchange Board of India (SEBI) in the year 2014.[3] They provide investors
with an opportunity to possess high-priced real estate and also to earn
dividends.
When does a company
becomes REIT?
There
are certain requirements which are required to be fulfilled for a company to
qualify as a REIT, which are as follows:
1) The
entity is required to be a business, trust or corporation.
2) It
needs to have fully transferable shares.
3) It
is required to be managed by trustees or board of directors.
4) It
should have minimum 100 shareholders.
5) Less
than five persons should not have held fifty-percent of its share during every
taxable year.
6) It
is required to pay 90% of the taxable income in the form of dividend.
7) Maximum
of twenty percent of the assets of the corporation must comprise stock under
taxable REIT subsidiaries.
8) Minimum
75% of investment assets must be in real estate.
9) Minimum
95% of the total income of REIT should be invested.[4]
Types of REIT:
Following
are the types of REITs:
1)
Equity:
Deals
with operation and management of revenue generating commercial properties.
2)
Mortgage:
Deals
with the lending of money, interest accrued on the money lend, acquiring
mortgage- backed securities.
3)
Private
REITs: These are not traded via National Securities Exchange,
not registered with Securities Exchange Board of India. They are reserved for some
selected investors.
4)
Publicly
traded REITs: These are enlisted on the National
Securities Exchange, also regulated by SEBI.
5)
Publicly
non-traded REITs: These are registered with SEBI and are
non-listed. These are not traded via National Stock Exchange.[5]
IS REIT THE BEST OPTION
FOR INVESTORS?
Merits:[6]
1)
Stability
in terms of dividend income:
REITs
ensure stable dividend income, and helps in earning capital appreciation for a
long and considerable time.
2)
Diversification:
Investors
can have diversification w.r.t. real estate investment, owing to the fact that
REITs are mostly traded via stock exchanges.
3)
Transparent
functioning:
REITs
are regulated by the Securities and Exchange Board of India. REITs are required
to submit audited financial reports to SEBI. This in turn makes it possible for
the investors to be updated w.r.t. taxation, ownership and zoning. Owing to
these checks and balances the entire process of investment becomes transparent
and results in REITs greater customer satisfaction.
4)
Liquidity:
REITs
generally trade via public stock exchanges. This makes it easy for the
investors to buy and sell, and hence liquidity.
5)
Less-
risk involved:
Investment
in REITs is secured and involves less risk owing to numerous factors. Minimum
of eighty percent of assets are invested in revenue- generating tasks. The
remaining twenty percent is directed towards equity shares of properties which
are listed, in mortgage based securities, equity shares getting at least 75% of
income from securities, money market instruments and cash equivalents.
Demerits:[7]
1)
Minimum
tax related benefits:
REITs
do not offer tax related benefits. An example of the same is, when dividend is
earned from REIT companies the said income is taxable. Hence, it is undesirable
from tax related aspect.
2)
Susceptible
to market- fluctuations:
Market
fluctuations play an important role in determining profit of financial
institutions. REITs are also subject to market fluctuations, which sometimes
may result into loss or meagre profits for investors.
3)
Less-growth:
When
it comes to capital appreciation REITs fail to provide adequate amount of the
same and is quite low. This happens owing to the fact that REITs 90% of the
earnings to the investors and the remaining 10% is reinvested.
CONCLUSION AND ANALYSIS:
It
goes without saying that investment is one of the safest options to generate
income and profit. Investors have varied methods through which investment can
be made. REITs are one of those methods. It can be mentioned that before opting
for REITs, investors should examine and invest in only those companies which
offer high capital appreciation and dividend. Also, it is essential to factor
the growth of a REIT in EPS and current dividend before investing.
[1] Franklin D. Roosevelt, (Aug. 20, 2020), http://www.realtymogul.com.html
[2]Divya Malcolm, REITs Regulation from 2014 to future (Aug. 20, 2020), http://www.mondaq.com.html
[3] I bid.
[4] Real Estate Investment Trust, (Aug. 20, 2020), http://www.groww.in.html
[5] Types of Investment, (Aug. 21, 2020), http://www.nerdwallet.com.html
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