What are REITs
Real Estate Investment Trust, which is commonly called REIT are an organization that collects funds from investors that uses the funds to invest in building and owning real estate properties.
One can consider REIT like a mutual fund, but portfolio created by real estate properties only.
Top multi national companies or real estate developing firms approach investors to invest in their projects in a return for a stake in their equity. This is similar to the IPO bidding process in case of stocks.
Know more about REIT as investment: What is a REIT (Real Estate Investment Trust)
Understanding the reasons why REITs are an excellent investment for long term
1. Invest in high end real estate properties
REIT funds invest in properties that have been thoroughly researched and analyzed. They are expected to have high demand in the near future.
These high-end residences are usually found in the city’s finest areas and are valued at premium prices, which range from a few hundred crores to a thousand crores.
Because of the large entry load, it is difficult for a retail investor to gain profits from these properties which are considered to have a great intrinsic value.
REITs, on the other hand, lower the large entrance barrier and allow individual investors to own a piece of these properties. Their investments are rewarded with a financial gain as well as a consistent rental yield that is proportionate to the initial money invested.
2. Regular rental yield
REITs just like any other physical assets generates a sizable rental yield. This rental yield usually lies from 2.5 to 5% of the real estate property. Also, these rental income grow by roughly 10% annually.
The reason for the high rental yield is the value of the real estate properties. For instance, these commercial properties in malls and office spaces are leased to companies which can manage to pay these monthly rentals.
Rental yield generated through REITs can be a great source for passive income for moderate risk investors.
3. Less volatile to economic disturbances
Real Estate are assets that are usually not very volatile to economic disturbances like stocks. Thus, this less volatility makes it ideal for long term investment.
As per the experts, REITs and real estate in particular can be a great way to invest for retirement. In fact, real estate assets have always proven to give good returns over a wider time frame of 30+ years.
The demand for real estate assets are directly proportional to population growth. REITs will tend to be less volatile as the underlying assets of these funds may not be impacted by these economic disturbances over a long horizon.
Disclaimer: REITs are less volatile to economic disturbances, does not mean that the said investment does not contain any risk. In fact REITs carry a different set of risk which needs to be thoroughly analyzed before investing.
4. Long term capital appreciation
The real estate assets owned by these REITs tend to increase in their valuation over a period of time. Real estate assets tend to increase in value over time. But as a matter of fact, these real estate assets do not grow equally and the gain tends to vary.
For instance, the real estate properties in Mumbai may grow at a faster pace when compared to the real estate assets in Indore.
REITs invest in properties by thoroughly analyzing the property to ensure that best returns from long term capital appreciation are rewarded to their equity holders.
One can rightly expect REITs to fetch roughly an average of 12 to 15 percent annual return over a period of 25 to 30 years. When you consider the additional rental yield of 2.5 percent every year, this is a fantastic return on investment.
5. More liquidity compared to physical assets
One of the factor that differentiates REITs from physical assets is the liquidity factor.
Owning high end physical assets can be ill-liquid due to the lack of right number buyers in the market. This ill-liquidity forbids the investors to sell their assets at market value.
The stock exchange trades REIT units on daily basis. As a result, compared to actual assets, purchasing and selling REIT units is much easier.
6. Participate in the sectorial rotation for capital appreciation
Assets appreciate over time in the form of cyclic rotations. Assets, particularly real estate do not grow linearly like fixed investment other fixed instruments like FDs, Bonds etc.
If you see the growth of real estate from 2008 onward, the real estate in India has nearly tripled till 2018.
The best way to stay invested and take the advantage of this bull run can be by investing some portion of your funds in REITs.
7. Diversification of capital in multiple REITs
The entry load for REIT assets are usually in lakhs. Thus, with a capital one would use to buy a residential apartment, one can invest that very amount in different REIT assets. These REITs can be in different states or countries with an economic upside potential.
Diversifying one’s real estate portfolio might help to mitigate the risk of real estate investing.
There can be instances where a local governing factor may affect the ability of real estate to generate rental yield in a particular state. As a result, a good diversified real estate portfolio with REITs can ensure that these state to state variations do not affect the over all gains.
These are some benefits of investing in REITs. Also, one needs to know that REITs only allow investors to benefit from the investment from there assets. The REIT unit holders do not hold any rights to use or maintain the properties managed under them.