You can be on Entrepreneur’s cover!

REIT - A new hope to the Real Estate Sector? Commercial real estate market had seen a downfall, however, after the implementation of REIT one can say that it's now seen as an opportunity for the commercial markets to grow again

By Parth Mehta

Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

Shutterstock

Real estate investment trust (REITs) have been a popular investment instrument across the world, however, Indian capital markets have witnessed its first initial public offering (IPO) recently. REITs is a medium for small and mid-level investors in commercial reality and gain at least a return of 7-8 per cent annually.

As per SEBI regulations, a REIT shall invest either in commercial real estate assets or through special purpose vehicles (SPVs). It was first introduced in 1960 in the US, to give ordinary investors access to real estate investment.

Changing the Structure

REITs are expected to be a game changer for the Indian real estate industry as they have bought into force capital investment and transparency at a time when the real estate sector was facing concerns like NBFC Crisis due to the asset-liability mismatch, liquidity crunch, etc. REIT IPO has definitely done wonders for Nifty Realty Index, since the market was trading at its highest peak since September 18th, 2018 reiterating the improved transparency bringing in confidence in the Indian realty market. REIT works just like mutual funds they help in sponsoring assets through trust and help the investors become owners of varied properties.

Commercial real estate market had seen a downfall, however, after the implementation of REIT one can say that it's now seen as an opportunity for the commercial markets to grow again which will help the investors looking for steady returns, beyond fixed deposits and fixed income funds.

The True Nature

Now, the question is how REIT will repay the shareholders with profit. However, REITs is mostly operated in a straightforward and easily sustainable business model. They lease the space and collect rent which helps the company generate income to pay back to the shareholders with profit.

As per REITs guidelines, at least 80 per cent of the value of the REIT assets must be invested in completed and revenue generating properties whereas the balance 20 per cent may go in under-construction projects, equity shares, money market instruments, cash equivalents, and real estate activities. It will lead to the generation of alpha in terms of potential returns for investors. REIT provides an avenue for institutional investors as well as retail to participate in real estate ownership.

REIT's has its advantages as well as its disadvantages:

Advantages:

1. Investors invest in REIT mainly for higher income and long term growth

2. It helps investors diversify their income streams.

3. As the REIT shares are traded over major stock exchanges, it is easier to buy and sell making it more liquid than the real asset.

4. Although stock markets can generate good returns during a bull run, the associated risks are very high. REITs are a more stable investment option.

Disadvantages:

Property tax can rise with the decision of the municipal authorities and the budget revenue may vary. This will result in reduced REITs earnings. REITs can only reinvest a maximum of 10per cent of their annual profits back into their core business lines. This will have the REIT grow at a slower pace.

The over-subscription of India's first Real Estate Investment Trust (REIT) issue reflects positive investor appetite for banking assets in the real estate sector. REITs will definitely improve liquidity in the sector and help attract investment from local and global investors, as the entry point for an investor is as low as INR 2 lakh. However, the success of REITs will purely depend on the return on these investments extended to investors.

Parth Mehta

Managing Director of Paradigm Realty

Business News

Mark Zuckerberg Says This CEO Is the 'Taylor Swift' of Tech

Meta's CEO posed with Nvidia CEO Jensen Huang on Instagram Wednesday.

Side Hustle

This Mom Started a Side Hustle After a 'Shocking' Realization in the Toy Aisle. Her Product Was in Macy's Within the Year — Seeing Nearly $350,000 in Sales.

Elenor Mak, now founder of Jilly Bing, didn't plan to start a business — but the search for a doll that looked like her daughter inspired her to do just that.

Growing a Business

To Achieve Sustainable Success, You Need to Stop Focusing on Disruption. Here's Why — and What You Must Focus on Instead.

Instead of zeroing in solely on disruptive innovation, embrace a pragmatic approach to innovation, recognizing and leveraging the potential within ongoing industry shifts.

Real Estate

3 Emerging Trends Shaping the Future of Real Estate

These three innovations are reshaping the real estate industry — discover tips for effectively covering these trends.

Thought Leaders

How To Improve Your Soft Skills and Emotional Intelligence in 7 Easy Steps

Using these simple but effective approaches will help a person in their business, life and relationships.

Business News

Sam Bankman-Fried Sentenced to 25 Years in Prison for Multibillion-Dollar Crypto Fraud

Southern District of New York Judge Lewis Kaplan said that the loss amount to the victims of Bankman-Fried's crimes surpassed $550 million.