Real Estate Investment Trusts, commonly known as REITs, have emerged as a popular financial instrument for investors who wish to gain exposure to the real estate sector without dealing with the complexities of owning physical property. For those who are risk-averse, experts often recommend that real estate should constitute only 5–10% of an overall investment portfolio. REITs provide a convenient and accessible pathway to achieve this allocation, eliminating the need to purchase a house or commercial asset outright.
REITs vs Physical Property: Key Differences
Investing in a REIT is fundamentally an indirect method of participating in the real estate market. When you opt for physical property ownership, you typically acquire a single asset, which requires a substantial upfront investment. Even in smaller cities, this can amount to at least ₹25 lakh. Beyond the initial cost, owning physical property comes with a host of responsibilities, including tenant management, maintenance issues, and navigating legal paperwork.
In contrast, REITs allow investors to tap into a diversified portfolio of income-generating properties without these operational hassles. Participants can earn regular rental income through REITs, starting with relatively small investments. Moreover, exiting a REIT investment is straightforward, as units can be sold on the stock exchange whenever necessary, providing a level of flexibility that physical property lacks.
Advantages of REITs Over Physical Property
Physical property investments demand significant capital, involve ongoing expenses such as repairs and property taxes, and can take months to sell due to market conditions. REITs, on the other hand, offer several distinct advantages:
- Liquidity: REIT units are traded on stock exchanges, enabling quick sales compared to the lengthy process of selling physical property.
- Lower Entry Barriers: Investors can start with minimal amounts, making real estate investment accessible to a broader audience.
- Professional Management: REITs are managed by experts who handle property operations, reducing the burden on individual investors.
These features make REITs a practical option for investors seeking steady income with enhanced flexibility.
REITs vs Mutual Funds: Understanding the Distinctions
It is crucial for investors to comprehend the key differences between REITs and mutual funds, particularly in areas such as liquidity, taxation, and investment objectives.
Liquidity Considerations
Mutual funds are known for their high liquidity, with redemptions typically processed on a T+1 or T+2 basis and minimal impact costs, allowing investors quick access to their funds. In contrast, SM REITs (Small and Medium REITs) often face limited liquidity. Finding a buyer for SM REIT units may take weeks or even months, and forced or urgent exits can result in discounts, potentially reducing realised returns. Practically, this means mutual fund investments can be redeemed within a day or two, while REIT investments may require a longer exit timeframe.
Taxation Perspectives
From a taxation standpoint, REIT income is taxed based on its components: interest income is taxed at the investor's slab rate, dividends are frequently tax-exempt, and amortisation benefits can be adjusted against capital gains. On the other hand, equity mutual funds currently attract a long-term capital gains tax of 12.5% and a short-term capital gains tax of 20%. New debt mutual funds are taxed at slab rates, adding another layer of complexity for investors.
The Emergence of SM REITs
SM REITs are gaining traction as an alternative investment option, particularly suited for mature retail investors. They offer portfolio diversification and exposure to both commercial and residential real estate without the necessity of directly purchasing property. This makes them an attractive choice for those looking to balance risk and returns in their investment strategy.
This analysis is based on insights from a journalist with over two decades of experience reporting on real estate, regulatory matters, and urban issues.
