Who should invest in REITs? Understanding risk and investment goals

Synopsis

REITs have made premium real estate investment accessible to retail investors in India. They offer regular income, portfolio diversification, and liquidity while carrying market and distribution risks. Regulated by SEBI, REITs provide an opportunity for stable returns and long-term wealth creation, making them an attractive asset class for investors.

Real Estate Investment Trusts (REITs) have gained popularity in India, offering retail investors a chance to invest in premium real estate without the hassle of direct ownership. Previously, such opportunities were available only to high-net-worth individuals, but REITs have made commercial real estate more accessible to a wider range of investors.

Understanding REITs: the basics

REITs are companies that own, manage, or operate high-quality, income-generating real estate assets. They allow investors to participate in real estate markets without buying physical property. REITs pool money from multiple investors to acquire and manage real estate assets, distributing at least 90% of their earnings once every six months. This makes them a compelling option for those seeking regular income.

In India, REITs are regulated by the Securities and Exchange Board of India (SEBI).

Who should consider investing in REITs?

REITs are suitable for investors who:

• Want to own premium Grade-A commercial real estate with a small capital outlay.
• Are comfortable with moderate risk and market fluctuations but want lower complexity than directly owning and managing property.
• Seek a steady income stream through regular, tax-efficient distributions.
• Want to diversify their portfolio with real estate exposure.
• Aim for long-term wealth accumulation through rental yields and potential capital appreciation.

Assessing risk appetite

Like any investment, REITs come with some risks. Key risks to consider include:

• Market risk – REIT unit prices can fluctuate based on global and domestic economic conditions, affecting investment returns.
• Distribution risk – Regular distributions depend on rental income, interest rates, tenant demand, operating costs, and economic conditions. A decline in occupancy rates or rental values may impact distributions.

Setting investment goals

Indian REITs offer attractive investment opportunities for retail investors. When considering REITs, primary goals should include:

• Earning regular income – REITs are required to distribute 90% of their cash flows once every six months, ensuring consistent payouts.
• Building a diversified portfolio – REITs have low correlation with other asset classes and cover different sectors and locations.
• Maintaining liquidity – Unlike traditional real estate investments, REIT units trade freely on stock exchanges, allowing investors to buy and sell easily.

Balancing goals and risks

REITs provide an opportunity for stable income and potential capital appreciation, making them a valuable addition to an investment portfolio. However, investors must carefully assess their financial goals, risk tolerance, and market conditions before investing.

By conducting thorough research and aligning REIT investments with long-term financial plans, retail investors can build a resilient and diversified portfolio. As the Indian REIT market continues to evolve, it presents significant potential for those looking to benefit from this innovative asset class.

(The author, Pratik Dantara, is Head of Investor Relations & Strategy at Nexus Select Trust and an Executive Committee Member of the Indian REITs Association. Views are personal.)

Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own and do not represent the views of The Economic Times.

...moreless

...moreless