Real Estate Investment Trust (REIT) has been introduced recently as per the guidelines set by SEBI. It is a concept borrowed from the western market. It has its origin in the USA where it was used with the motive of allowing even small investors to participate and make a profit from the emerging and fast growing property market. The concept got approval from many nations across the globe and saw great success in South Asian countries too.
REITs are like companies which make an investment in a range of products for making a good return and manage their portfolio to maximize wealth creation in a line similar to mutual fund companies but not exactly same. REITs invest the pooled money from the investor in revenue generating properties and also invest in mortgage and mortgage-based loans.
The motive is to generate revenue from rentals and interest income. There are three types of REITs existing in the foreign property market. Equity REITs invest money in revenue-generating real estate commercial properties to own and manage them. Mortgage REITs invest in mortgages and mortgages based securities for generating returns and Hybrid REITs are the combination of equity and mortgage REITs.
Since the launch of REIT was to benefit small investors which in turn would help the real estate business, provision has been made to keep the risk element at its minimum. In India, almost 90% of the investment needs to be made in properties for earning monthly rentals and the remaining 10% can be used to invest in mortgages and loans.
The REITs are supposed to return 90% of the income to the shareholders by means of dividends on yearly basis. Hence, it can be seen that REITs are an investment option for the investors to receive regular rental income. REITs are governed by a board of trustees, directors, and experienced managers. They can issue shares in the market to become public and allow retail participation.
The REITs will need to follow the SEBI guidelines to get a pass-through status for tax concern. They are allowed to churn their portfolio to maximize returns for the stakeholders but they cannot invest in a property with the sole intention of profit making. They can, however, provide funding or own an upcoming project which can later be either retained for rental income or sold for booking profit. It does not allow speculation on properties.
REIT will help in the growth of the real estate business in the country by creating a new channel to finance the cash-strapped developers and builders. It will help even the small investors to reap the benefits of investing in the property market which otherwise would not have been possible for them.To know more visit Propknack