Real Estate Investment Trusts (REITs): What You Need to Know

What are REITs?

REITs or Real Estate Investment Trusts is a company that owns, operates, or finances income-producing real estate properties. They pool money from the investors and invest it in projects such as malls and other types of commercial real estate. There you are investing in real estate but you are not going to buy any physical thing. You begin with some form of enormous investment there. So, in this case, you earn rental income as a yield via dividend and interest pay-off of the investment. The REIT is nothing but the stock quoted on any stock exchange wherein it gives rights to ownership with the share one holds. Here, one can buy or sell at any given moment, over the stock market, wherein trading is available.

How shall the company be eligible to enter the REITs category?

The requirement for eligibility for being classed as REIT will go by the conditions as observed by the Company:

• The trust must have been established under the Indian Trust Act, of 1882; further, registration in SEBI must have taken place from the SEBI REITs regulations.
• 80% of the investments must be made in the income-generating property. The remaining 20% can be invested in any other instrument.
• Only 10% of the total investment can be carried out in under-construction properties.
• Investment can be carried out only in commercial real estate as well as office premises.
• 90% of the total income has to be paid to shareholders through dividends.
• The asset base has to be a minimum of Rs. 500 crores.
• NAV has to be declared at least twice during each financial year.
• REIT has to be listed on the stock exchange.

Various types of REITs

Depending upon the type of Real Estate holding, many types of REITs have been discovered in various parts of the world. Some of them are: 

Equity REITs:

It is the most widely found type of REIT. It buys and owns properties with income-producing real estate. These could be commercial buildings or offices. The revenues are therefore obtained from renting out and sales proceeds, and the cash flow is remitted to shareholders as dividends.

Mortgage REITs:

These are also referred to as mREITs and primarily make loans to the companies involved in the real estate businesses. All the interest income they thereby generate is used to develop profits that further get handed over to the shareholders.

Hybrid REITs:

It gives you the best of Equity and Mortgage REITs. It enables investment in both physical property as well as real estate debt instruments. It offers an opportunity to diversify investments between debt and equity. It offers two different kinds of income, which are rent income and interest income.

Publicly Traded REITs:

These are listed at the National Stock Exchange and, therefore, also registered with SEBI. You can acquire or dispose of these REIT’s shares through the stock exchange. This makes this investment very liquid. However, on the other hand, like every other listed security, they too move in tandem with market sentiment and face the vagaries of it as well.

Public Non-Traded REITs:

Publicly traded REIT, but not listed in any particular stock exchange. Also, they are registered with SEBI, but you can’t buy or sell those REITs through any online medium; so it has low liquidity. Shares will be bought and sold, directly through the REIT’s company itself or through a second market set up by some broker-dealers.

Private REITs:

They are not registered under SEBI, and also they do not get listed on the stock exchange. It is available mainly to selected investors. Compared to REITs that get listed in public exchanges, they have less liquidity.

REITs Taxation Rules:

As income from REITs comes to the investors in different types, so for both types of income, different taxation rules are applicable one for dividend income and the other for Capital Gains. Also, the tax treatment is different in the case of redemption of investments that have been made through the International REITs Fund of Fund. Taxation applicable to those rules is as follows:

Taxation of Dividends:

As per prevailing provisions, all dividends received by the investor from REITs are fully taxable in his hands. Dividends distributed by REITs form part of the annual income of the investor and are taxed accordingly, as per the slab of the investor for the relevant Financial Year.

Capital Gains Tax:

 All sales of REIT units will attract both STCG as well as LTCG in line with other equity investments. The amount of units can be said to fall under STCG if the holding period is less than or equal to 1 year from the time it is allocated. For such STCG, the percentage of tax that is applied is 15 percent on the capital gains achieved during the selling of the same units. If more than 1 year has elapsed since its allocation, then it would come under the head of LTCG, and so the applicable tax rules of LTCG. The LTCG tax rate is 10% of gains over Rs. 1 lakh with no indexation benefit, for all equity investments, for the applicable FY.

Taxation of Capital Gains of International REIT Fund of Funds: 

Regarding capital gains emanating from units of International REITs being sold, the rules regarding capital gains taxation are non-equity rules. In this case, if the holding period is not more than 3 years from the date of distribution of units, then Short Term Capital Gains will be applied. Here, the LTCG tax on such gains is applicable with 20% of indexed capital Gains, which is calculated after more than 3 years from the date of unit distribution or more. The slab rate is liable for the fiscal year, so determined by the investor therefore STCG follows per fiscal year.

Conclusion

REITs, or Real Estate Investment Trusts is an uncommon form of investment in the real estate sector, not to say owning the properties straight. Through the collection of funds from different investors, REITs give access to an array of diversified income-generating real estate properties.

Accordingly, REITs should be classified for the type of risk as well as its reward associated. Still, even though REITs are an ideal stream for investment by giving steady income through their dividend yield, they can be sensitive to some market fluctuations and economic factors.