NSE has launched India’s first-ever Nifty REITs and InvITs index. What exactly are REITs and why do they matter?
REITs (Real Estate Investment Trusts) are an affordable way to invest in commercial real estate, without buying property. You can invest in a REIT with as little as ₹10,000.
They operate like Mutual Funds. Retail investors give money to a REIT manager who finds good income-producing commercial properties to invest in. Investors earn returns from the capital gains and the rental income generated by the properties. The income earned by these properties is transferred to investors in the form of dividends, interest, or capital repayment.
The three listed REITs in India are Embassy Office Parks, Mindspace Business Parks and Brookfield India Real Estate Trust.
6 factors to look at while evaluating REITs: NAV, Occupancy Rate, WAL-E, Distribution Yield, Portfolio Quality, and Taxation
- NAV: REITs’ NAV is the market value of its properties minus the trust’s liabilities/debts.
- Occupancy Rate: Higher the occupancy rate, the better it is. A band of 85%-90% is considered a good occupancy rate.
- WAL-E: It is the Weighted Average Lease Expiry that is somewhat opposite to occupancy rate. WAL-E calculates the time left for the property to go vacant. Higher the WAL-E, the better it is.
- Distribution Yield: It represents the returns REIT unitholders earn as a percentage of its current market price.
- Portfolio Quality: It can be divided into two variables. The first one is tenants–a good REIT is not dependent on just a few clients. The second variable is geographical spread. The more diverse the geographies are, the better the portfolio quality is.
- Taxation: In India, dividend income from REITs are taxed at slab rate while capital gains is applicable on sale of REIT units. Any capital repayment that the unitholder gets will also be adjusted against the cost of acquisition and taxed at the time of sale.
Now that you know about REITs, do you think you’d invest in them?