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The India Real Estate Investment Trust (REIT) market displays promising prospects and is projected to encompass around 180 million square feet (msf) of office space, constituting 22% of the total Grade-A stock by the conclusion of 2024, according to the latest Asia REIT Market Insight report for 2022–2023 by Cushman & Wakefield.
The report indicates that the collective worth of the Asian REIT market reached $263.8 billion by the close of 2022, denoting a decline of 14.7% compared to the end of 2021. In this context, India ranks fifth with a market valuation of $7.41 billion. So, investing in REIT stocks seems to be a smart choice. In addition, there are even REIT mutual funds too. Let’s find out more.
Understanding REITs
Real estate investment trusts, or REITs, are businesses that own diverse portfolios of real estate-related assets, including buildings used as offices, residences, retail locations, data centres, cell towers, hotels, and factories. These assets generate revenue from rent and capital appreciation. A unique aspect of REITs is their legal obligation to distribute at least 90% of their annual taxable income to investors in the form of dividends, making them distinct investment instruments.
There are three main types of REITs:
- Equity REITs: These REITs own and often manage income-generating real estate properties. Each share in an equity REIT corresponds to a portion of the tangible real estate assets.
- Mortgage REITs (mREITs): These REITs deal with commercial or residential mortgages, either acquired from financial institutions or invested in mortgage-backed securities (MBS).
- Hybrid REITs: Combining aspects of both equity and mortgage REITs, hybrid REITs hold a mix of actual properties and mortgage-related securities.
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REIT Mutual Funds Explained
Real estate mutual funds, commonly referred to as REIT mutual funds, are investment vehicles that combine investor money to buy stock in companies that build both residential and commercial real estate.
- While these funds function similarly to other equity-based mutual funds, they provide retail investors with proportional ownership in income-producing real estate assets rather than ownership in enterprises. Skilled fund managers oversee the investments in these funds to generate favourable returns and manage risk exposure.
- Real estate investment funds are supported by a sponsor or financial entity that facilitates their operations and transfers asset ownership to the fund in exchange for its units.
- Investors contribute a predetermined amount to these mutual funds and accrue earnings through capital appreciation and dividends.
Why Invest in REIT Mutual Funds
The ideal candidates for investing in real estate mutual funds in India encompass individuals who lack significant capital to physically purchase real estate yet desire to capitalise on escalating property prices.
REITs serve as a method for retail investors to systematically participate in the real estate market by making consistent monthly investments. Individuals who fit any of the following criteria can consider investing in REIT mutual funds:
- Real Estate: REITs offer a way to engage in and take part in the expansion of the real estate industry for people who are interested in its potential for financial gain.
- Limited Capital: Unlike direct property ownership, real estate funds offer entry with comparatively lower capital requirements. With investments as modest as ₹5,000 per month, real estate mutual funds provide an attractive option for individuals with limited funds.
- Inflation Hedge: Amid economic pressures such as inflation, traditional asset classes like equities can suffer value declines, leading to investor losses. However, by taking advantage of growing real estate values, keeping real estate assets and investing in REITs may be able to act as a hedge against inflation.
Key Features of REIT Mutual Funds
Enhanced Liquidity
Investing directly in real estate often poses challenges in terms of liquidity, as selling property can be cumbersome. However, opting for Real estate investment funds eliminates this concern, as investors can easily liquidate their holdings as needed, facilitating potentially higher returns.
Portfolio Diversification
REIT mutual funds allocate their funds across a broad spectrum of properties encompassing commercial, residential, and agricultural sectors. Consequently, investors can enjoy the advantages of various sub-sectors simultaneously, contributing to portfolio diversification.
Investment Flexibility
This investment scheme offers investors considerable flexibility. Depending on their financial goals and desired investment amount, individuals can select the specific funds that align with their preferences. Reputed financial houses like Share India offer a variety of REIT funds that give one the scope to invest in the best REIT companies in India.
Portfolio Stability
An additional hallmark of top-performing REIT mutual funds lies in their ability to mitigate the inherent high risks often associated with real estate investments. For instance, while real estate prices can exhibit substantial volatility, the diversified nature of these funds tends to dampen the impact on their overall performance.
Challenges Associated with Investing in Real Estate Funds
Market Volatility
The performance of these funds heavily relies on property demand (both for rent and purchase). Strong market conditions yield good returns, while a sluggish market hampers performance.
Interest Rate Sensitivity
The prevailing interest rate environment influences the real estate market by directly affecting borrowing rates.
Tax Implications of Real Estate Mutual Funds
Real estate investment funds serve as sources of income for investors, the Indian government, in collaboration with the Income Tax Department, mandates taxation on the earnings and income derived from these investments. However, specific tax guidelines have been established for taxing REIT investors. Here is a breakdown of the tax implications concerning real estate funds:
- Investors are subject to a 15% short term capital gains tax if they sell their investments within a year of holding.
- Investors are subject to a 10% long term capital gains tax if they sell their investments after holding them for more than 36 months.
- The interest income generated through REITs is taxable as per the relevant income tax slab.
- Dividend income’s taxability depends on whether the company has obtained a special tax concession; if so, the income is taxable in the hands of the investors.
- Income from the amortisation of Special Purpose Vehicles (SPVs) within REITs is not subject to taxation for investors. SPVs are independent subsidiary companies created for specific purposes.
Conclusion
REITs offer a cost-effective approach for investors to establish their presence in the dynamic real estate market. The global real estate sector has demonstrated substantial growth trends that continue to surge ahead. The escalating population has led to frequent real estate transactions, fostering new avenues for development. This juncture presents a prime opportunity to align with India’s top REIT mutual funds for real estate investment. Therefore, proactive investors are encouraged to seize this opportune moment by allocating a reasonable sum into REIT index funds or real estate mutual funds, thereby reaping commendable returns.