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In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/492
Real Estate Investment Trusts are companies that own, manage, and fund a large amount of real estate.
REIT (full form Real Estate Investment Trusts) are newer types of real estate investment firms that provide high returns. Introduced in India in 2007, they allow large and small investors to make significant returns on their investments. These make for very lucrative short-term investments for potential investors, unlike traditional real estate investments. With informed financial planning, investors can find a stable source of revenue that can last for a long time as well. It is important, however, to fully understand what are Real Estate Investment Trusts, the many types of REITs, and the various advantages and disadvantages of investing in them.
REIT, meaning Real Estate Investment Trusts; is a company that owns, operates, or finances income-producing real estate. These companies pool together capital from various investors to invest in large-scale properties like shopping malls, office buildings, apartments, and hospitals. Instead of buying a property yourself, you buy shares in a REIT, which owns and manages these properties on your behalf.
REITs allow both large and small investors to make significant returns on their investments. Smaller investors can band together with other investors to engage in large commercial real estate ventures. REITs thus offer smaller investors the opportunities to invest in healthcare facilities, housing complexes, gated communities, data centers, IT Parks, and other properties.
There are many types of REITs, although most classify REITs based on two factors: What type they are and how you can invest in one. These types of REITs are:
Equity REITs are equity-based REITs that own and operate income-generating properties. These REITs earn money and revenue by collecting rent from tenants who rent the different properties they hold. This form of REIT generates money from renting and maintaining assets rather than selling them. Equity REITs account for more than 96% of all REITs.
Mortgage REITs provide funds to people who want to own or operate real estate of their own by providing them with loans or mortgages. They generate income from the net interest margin, the margin between the interest they earn on the mortgage versus the cost of funding these loans. Using this model to make their earnings makes them very sensitive to any interest rate changes, although equity-based REITs are also affected by these changes. Mortgage REITs hold around 4% of the market share and are less frequently found.
Hybrid REITs were once used to mix the investment strategies of both Equity and Mortgage REITs to generate revenue. These trusts lost all relevance after the 2008 Financial Crisis because regulations around REITs changed, and they were incentivized to specialize as either Equity or Mortgage REITs.
Private REITs are unique, as they don’t trade on securities exchange. They can only be sold to institutional investors. This is because they are unfortunately used frequently for any REIT-related frauds and Ponzi schemes. Most REITs of this type are safe and legitimate, but it is much easier for any con artists to defraud potential investors through Private REITs that don’t have to report to any regulatory agencies.
Publicly traded REITs list their shares on a public exchange, where they can be bought and sold by any investors. These types of REITs fall under SEBI (Securities and Exchanges Board of India) regulations.
These types of REITs are registered with SEBI but don’t trade on any public exchanges. This makes them more stable than Publicly traded REITs because they are not subject to market volatility. Any potential investor can buy shares of these types of REITs through brokers or financial advisors with some connections or contracts with this type of REIT.
Interested individuals can buy shares in a REIT listed on the NSE. These parties may also purchase shares in a REIT mutual fund or an exchange-traded fund.
REITs offer a lot of unique benefits, especially when paired with other investments in your portfolio. People who invest in a REIT will have access to the following benefits:
REIT investing provides a substantial dividend income to investors. They also allow you to have a steady capital appreciation of your investment. This aspect of them makes them very lucrative long-term investments in certain ways.
Most REITs are listed and traded frequently on the stock exchange, providing investors an opportunity to diversify their real estate holdings.
Because they are regulated by the SEBI, REITS must file financial reports that are audited by professional auditors. This provides investors with access to information and data like tax reports and cashflows, making them very transparent.
REITs are generally very easy to buy and sell since they trade on public stock exchanges. This makes them very good short-term investments that can be bought and sold very frequently.
REITs offer their investors risk-adjusted returns and help them generate a steady stream of revenue. This provides them with a reliable source of income they can rely on even if there is a high rate of inflation.
Despite their many benefits, there are some limitations that REIT investors must keep in mind. REITs can be limited in their benefits, particularly if you have not diversified your REIT investments. Some of the limitations of investing in REITs are:
REITs do not offer their investors any tax savings, deductions, or benefits. The dividends you earn from REIT companies are all subject to taxation.
One of the biggest risks associated with investing in REITs is that they are vulnerable to market-linked risks and changes. Investors with a weak risk appetite should thus make an informed decision on whether they want to invest in REITs.
REITs usually offer a very low rate of capital appreciation to their investors. This is the case because they return a majority of their earnings to all of their investors and utilize the rest of the money for their expenses.
To be classified as a REIT, a company must fulfil a variety of organizational, operational, distribution, and compliance requirements. Doing so will allow SEBI access to the financial records of the REIT and will allow them to be publicly traded in the NSE. These are:
REITs were first introduced in India by the SEBI in 2007. In 2014, the Government passed a law that allowed REITs to be set up in India. There are currently 3 REITs that are listed in the NSE. These are Embassy, Mindspace, and Brookfield.
In 2021, they had a 6.85% year-on-year growth in the total leasable area, with Mindspace REIT having returns of 8.11% in the 2022 financial year. This shows that they have solid returns as investments, with the capacity of capital appreciation as well.
1
Taxes apply to interest income obtained from REITs. Dividend income tax is determined by whether the REIT received a special tax break from the government.
2
They allow individual investors to invest in real estate assets without directly owning or managing them.
3
REITs are subject to variations in regional demand, lease occupancy, and property value.
4
Typically, REITs invest in specific areas of commercial real estate sectors like retail or shopping centers, hotels and resorts, or healthcare and hospitals.
5
While direct real estate investments seek to create value through the appreciation of the buildings they hold, REITs distribute dividends to investors.
6
REITs typically impose asset management fees to pay for the expenses of maintaining their real estate holdings.
7
Unlike traditional real estate investments, most REITs are very liquid since they are publicly traded like stocks.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
