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Tuesday, May 02, 2017

FAQs on Real Estate Investment Trusts - REIT's

By on Tuesday, May 02, 2017

FAQs on Real Estate Investment Trusts  - REIT's

1. What are REITs? 

It is a mutual fund that invests in real estate.

2. Where can they invest? 

Commercial real estate only through a special investment vehicle (a 3rd party firm) or directly.

3 What is the asset allocation? 

Eighty  percent (80%)  in completed rent-generating properties.
 Rest in cash, money market bonds, government  or corporate bonds, realty stocks and property under construction.

4 What is the minimum investment required? 

Rs. 2 (Two) lakh.
And when it is listed in the exchange the trading lot will be worth Rs. 1 lakh.

5 Will I get a dividend?   

There is no "growth" option! Twice a year (at least), the REIT will have to distribute 90% of the income as a dividend.

6 How are they taxed? 

The dividends are tax-free. The dividend distribution tax associated with them has been scrapped.

Moreover, capital gains from units less than 3Y old will be taxed at 15%+ cess and above that is tax-free.

7.  What are the risks? 

The REIT combines the concentration risk of a sectoral mutual fund and the credit risks of a debt mutual fund.  Recessions can hit developing commercial real estate pretty bad. There can be defaults or lack of tenants.

There is no benchmark to compare with, aside from say, a fixed deposit. Rental yields are low and hence one cannot expect inflation beating returns (inflation ~ lending rate).

8.  My equity or debt mutual fund wants to invest in REIT. Is it okay to continue with it?

 Yes. The investment limit is capped at 10%.  If you invest directly in a REIT, the risk would be much higher.

Even if the REIT portion does not result in better returns, it could  (repeat, could) lead to better diversification and lower risk. This remains to be seen though. There is no need to exit a fund just because it wants a slice of the REIT or InvIT pie.

9. What is the structure of a REIT? 

Besides the unit holder on one end and the asset (the property) on the other, there are three other entities:
  • The sponsor who set up the REIT and hold the min no of units to make it valid.

  • The sponsor appoints a Trustee who holds the investor units and oversees the fund management.

  • The fund manager who is responsible for security selection

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