Before we appreciate the advantages of REIT, let us understand the meaning of REIT firstly.
A real estate investment trust, or REIT, is an organization that gathers cash from investors and invests them in the construction and ownership of real estate buildings.
Do Read 7 Reasons Why REIT Are Excellent Investment For Long Term to know more about the investment benefits of REIT assets.
The following are the 6 Main Advantages of Investing in REIT
1. Higher rental yield
If you compare the rental yield of a physical asset to that of REITs, it is evident that the yield of that of an REIT asset is on the higher side.
Therefore, the reason for there high rental yields come from their portfolio of real estate propertied that are present under those particular REITs.
They may be assured of a better income ratio as they are mandated to transfer approximately 90% of their revenues in the form of dividends to REIT investors.
2. Regular passive income
REIT provide a regular passive income in the form of rental yield.
Thus, the passive income gets generated through REIT units, just like the way one would get rental income from physical assets.
This income comes without any much hassle of finding a rental partner and creating any lease agreements between the owner and the lessee.
Hence, the risk of the lessee being the defaulter is shifted to the REIT. The investor also takes the advantage of not being involved in the arrangements.
3. Advantages of Portfolio diversification
Instead of investing 1 crore in one property, one can diversify that capital into multiple REIT assets. This is a great advantage for risk management strategy for moderate risk investors.
Diversifying your real estate portfolio ensures that your overall investment returns are stable, and that even if one asset under performs, the rest compensates for it.
Imagine one invests a large capital on an apartment in a desired locality. Due to the local disturbances, the apartment loses its market value. This is a major risk for investors.
Just like the case of stocks, the real estate investments need to be diversified in areas of different locality and types of real estate like commercial, residential or hospitality. This can yield positive returns by averaging the overall performance.
REITs make it possible to enjoy the benefit of portfolio diversification for retail investors with small capital.
4. Invest in real estate properties with lower capital
Investing in real estate properties requires a large sum of capital. This could be an issue to many retail investors to find it difficult to arrange this capital.
Taking a loan to support your investment is also not recommended because your profits will be diminished when you pay interest on your borrowing. This could also create negative returns on the particular asset.
Similarly, the entry load for REIT units start from Rs. 45,000/- which can be a great start in real estate investment with low capital.
5. Higher liquidity
One of the most significant advantages of REITs over physical assets is that they are more liquid. Once the REIT units have been issued, they may be traded on a stock exchange platform, where they can be sold and bought exactly like stocks.
Also, one need not sell the entire REIT investment in one go. The investor has the ability to sell the units in parts, thereby further reducing the risk and increases the chances of gaining better returns
6. Regulated by SEBI
The REIT units and the transactions are closely monitored by SEBI. Thus, it ensures that the interest of the investors is protected and no company is indulged in fraudulent activities of pulling money from people.
SEBI also guarantees that REIT units are allotted appropriately which are liquid enough to be traded in secondary markets.
Download the “Securities and Exchange Board of India (Real Estate Investment Trusts) (Second Amendment) Regulations, 2020” for more information on the regulations imposed by SEBI.
In a nutshell
|Sr No||Advantages of Investing in REIT|
|1||Higher rental yield|
|2||Regular passive income|
|4||Invest in real estate properties with lower capital|
|6||Regulated by SEBI|
REITs are digital real estate assets. One needs to know that the owner of REIT units does not entitle them the right over the physical property under the portfolio of the desired REIT units.
If the investor wants to invest in real estate in the intention to use the physical space, the physical property will be the only alternative.