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Real Estate Investment Trust: Tax benefits, transparency, diversity – key advantages of investing in REITs

real estate, real estate investment, REIT, Real Estate Investment Trust, tax benefits, transparency, ease of investment

Real estate in India is often seen as a product for investment as well as consumption. One’s home equity is often one’s biggest and most valuable asset and, therefore, a lot of thought and analysis goes into making the decision to buy real estate. An emerging concept to propagate further investment in real estate is the advent of 'Real Estate Investment Trust' (REIT). The concept is still in its nascent stage in India, but has been a widely-used investment avenue in the West for many years.

REITs are similar to mutual funds in that they enable you to invest in a pool of real estate assets without actually owning the physical asset itself. REITs own rent-yielding assets, typically office spaces and commercial establishments, and work as a pass-through entity for investors who buy into this portfolio of assets. While REITs in India currently primarily operate in the office/commercial sector, the same can be replicated for retail spaces, malls, apartments and hotels. The reason this segment hasn't gained much traction in India yet is because rental yields on commercial assets far outstrip the yields of other asset classes.

The primary objective of REIT investment is to generate income distribution and long-term appreciation potential, wherein assets are meticulously managed and the revenue generated from them, normally in the form of rental income, is efficiently distributed amongst REIT holders, after accounting for fees, including REIT management and property management.

The investment process for REITs is quite seamless. Money is raised from unit holders through an initial public offering (IPO), for the REIT to purchase a pool of real estate properties, which are then leased out to interested tenants. In return, the flow of income generated is directed back towards investors in the form of income distributions a.k.a. dividends, creating a win-win situation for all.

For investors, REITs work as an additional avenue of investment. They provide a steady stream of income and the potential of property appreciation over the course of their holding. The following are some of the key advantages for investors in REITs:

# Tax benefits-As per regulations, a distribution of at least 90% of taxable income each year to investors/unit holders for enjoying tax transparency treatment by IRAS is mandatory. Individual investors who receive these distributions also enjoy tax exemption treatment.

# Transparency and flexibility-Interested investors can access information on REIT prices and trade REITs throughout the trading day.

# Diversity - REITs comprise a percentage of a well-diversified portfolio including an emergency savings account, stocks and mutual funds, precious metals, and several others.

# Hassle-free execution-REITs' biggest advantage is the ease of investment, as they provide a seamless means for the average investor to access a relatively expensive property market - especially commercial real estate, either via an exchange or over the counter, in the form of a mutual fund.

(By Farshid Cooper, MD, Spenta Corporation)