A while back, Brookfield REIT came out with its IPO. Read our review on the IPO here. We thought it would be great to do in detail and understand what a REIT is.
A real estate investment trust (REIT) will be a new term for many of us. To make it simple, REIT is very similar to a Mutual Fund. In a mutual fund, you see many investors putting their money and the fund managers allocating that sum to different asset classes. Likewise, a REIT gives you an opportunity to invest in real estate companies and derive income from that. A REIT owns, operates, or finances income-generating real estate. These trusts take money from small and big investors and put it into real estate companies. A REIT can possess a number of properties like complexes, infrastructure, healthcare units, apartments and more.
For example, imagine a shopping complex which is one of the popular spots in your city. A REIT could be the supposed owner of that mall. The rent which is collected by the trust is shared to the investors like you and me. This means, more the units you own, higher the income you will derive. In a way, you are a partial owner of that famous shopping complex! How amazing is that, right? Similarly, by investing in REITs you can own some part of high-priced real estate.
Qualifications to become a REIT
- Minimum 100 shareholders should be present.
- It has to give at least 90% of the taxable income as a dividend.
- Collect a minimum of 75% of total income from mortgage interest, real estate sales and rents.
- Minimum of 75% of investment assets must be in real estate.
- Less than five individuals should not have held 50% of its share.
Types of REIT
|Equity||These REITs own income-producing real estate. The main source of income is rent.|
|Mortgage||They hold mortgages on the real estate property by lending money to proprietors. They generate interest income from the money lent.|
|Hybrid (Equity + Mortgage)||As the name suggests, they own properties and hold mortgages both together.|
Pros of a REIT
- Stable and diversified source of dividend-based income.
- High potential for steady capital appreciation over the long term in the booming real estate sector.
- REITs are traded on stock exchanges. That means it comes with higher liquidity as people can buy or sell stock easily.
- Highly regulated by SEBI. Thus, every information is passed on to the shareholders.
Cons of a REIT
- Just like other stocks, dividend earned from REIT is taxable as regular income.
- Only 10% of taxable income can be reinvested back to buy new holdings. Rest 90% has to be paid to the unitholders.
- High dependency on the real estate sector of the country. Thus, increasing the market risk of the investment.