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REITs are essentially a pooling vehicle which allow investors to participate in small amounts into a securitized real estate-linked investment. on the one hand, these securities help to make investing in real estate more accessible, long term and income-oriented. on the other hand, they also help to build an efficient secondary market for developers to exit projects. REITs usually will invest in commercial properties and use rental income to distribute as dividend to unit holders. Typically, REITs are used to invest in completed property for a stable income stream and not property which is under construction. Globally there are two major kinds of REITs available.
Equity REITs
These structures own or develop and hold properties either individually or through special purpose vehicles. Hence, they are referred to as equity REITs. The income is essentially in the form of rent received from leasing out the property. Majority of this income then gets transferred to unit holders as dividends. As rent is a regular income, the earnings of REIT holders are more or less regular. These are securities which traditionally are seen as long term investments.
Mortgage REITs
These operate mainly by lending money to owners of properties in exchange for a mortgage claim on the property. Such REITs may also invest directly in mortgage-backed securities. They earn money through the interest charged on such loans. Hybrid REITs are also available which use a combination of the above two types.
Benefit over physical investment
The advantage of REITs is that it is regulated and managed under a trust umbrella. This means that there is accountability and audit around the use of investor funds. Real estate is often considered as an unorganized sector and there can be ambiguity linked to transaction value. In case of REITs the transactions are monitored and there is a specified method for valuations of properties, hence the ambiguity is reduced.
Domestic Scenario
REITs are popular securities in global markets as they offer a tax effective way of utilizing long-term savings from investors across the curve, retail, high net worth and institutional. In mature markets certain types of REITs are even designed to focus on a specific segment in the real estate space, for example, investing only in malls and so on. So far in India you can invest in property either by buying directly which can be quite expensive or through real estate funds which operate under the alternative investment fund umbrella and require a minimum investment of Rs.1 crore. Draft guidelines for the launch of REITs have recently been released by the Securities and Exchange Board of India. The draft mentions that REITs can invest in completed property and in mortgage-backed securities.
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