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Real Estate Investment Trusts (REITs)

This article introduces the concept of Real Estate Investment Trusts (REITs) and talks about their benefits.

All of us are familiar with the concept of mutual funds – they pool investors’ money, and collectively invest it in equities and debt securities. Thus, they provide diversification while requiring very low investment. Plus, you can indirectly own shares of even those companies whose shares have a very high market price (like MICO, which quotes at around Rs. 5100 for a single share!)

 

Issues with direct real estate investment

All of us have also seen that the real estate market has been booming for some years now, and the prices are only expected to go up. And all of us want a piece of that action!

But unlike stocks, real estate investment needs even more capital – at least in the range of Rs. 15 Lakhs for a 1 bedroom apartment in a tier II city! Not many of us can spare that kind of money to invest, that too in just one property, concentrating our risk.

Wouldn’t it be nice, if there was a mutual fund for real estate investment? Then, all the benefits of a mutual fund would be available for real estate investments! That would be great, wouldn’t it?

Well, it is time to give a grand welcome to Real Estate Investment Trusts (REITs).

(Please click here to read more about SEBI’s proposal on Real Estate Investment Trusts – REITs)

 

What are Real Estate Investment Trusts (REITs)?

Simply speaking, Real Estate Investment Trusts (REITs) are mutual funds that invest in real estate instead of stocks or debt securities. They raise money through stock exchanges, and are listed on the stock exchanges.

Like mutual funds, they collect small amounts of money from common investors, pool it, and use it to invest in real estate properties.

REITs are very popular both among retail and institutional investors around the world. They are also known as Real Estate Mutual Funds (REMFs) in some markets.

 

Benefits of Real Estate Investment Trusts (REITs)

Low investment

You need to invest only a fraction of the money needed to buy a property on your own, but would still be able to participate in the rally in the real estate market!

Diversification of risk

If you invest on your own, you can buy say one or two properties, whereas a REIT invests in many properties using the pooled money. Thus, you are able to spread your risk between various properties and projects. Imagine owning a share in apartments in Mumbai and Delhi, and in some posh malls in Gurgaon and Bangalore at the same time!

Liquidity and transparency

When REITs become active participants of the real estate market, they would bring the much needed transparency to it. Since they would need to report all transactions, this would result in a reduction of cash transactions in the real estate market. They would also make the property market more liquid.

Exit route for Private Equity investors

Recently, we have seen a lot of investment in various real estate projects by Private Equity investors (Estimate for year 2007 is Rs. 25,000 Crores). REITs would be large buyers who can buy properties from Private Equity investors, thus giving them an attractive exit route. This would encourage Private Equity investors to invest even more in the real estate market, which can further strengthen the market.

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