We are Wealth Clinic Team
Even for people who can afford to buy a house, investing in commercial real estate is a difficult task.
Most Indian families’ top goal is to own their own home, which gives them both security and comfort. In addition to problems like encroachment or bad title documents, property taxes, and upkeep costs, a large amount of capital is needed. Even for people who can afford to buy residential property, investing in property is hard because it takes a long time to get legal approvals, find trustworthy renters, etc. REITs (say “Reets”) might be an answer or a solution to the problem of how to use the money from individual investors. Let’s talk about REITs in more detail, shall we?
1. What are real estate investment trusts, or REITs?
REITs invest in commercial real estate assets like office buildings, hotels, shopping centres, commercial complexes, solar parks, and other types of commercial real estate. REITs own and run real estate assets through direct or indirect stakes in Special Purpose Vehicles (SPVs). SPVs are used to make rental income, interest and dividend income, and capital gains that are given to investors in the form of dividends and interest.
The sponsor, the manager, and the trustee are the three levels of a REIT. The sponsor is in charge of using his money to market the REIT. At the same time, the SEBI (Real Estate Investment Trusts) Regulations of 2014 control REITs. The management is in charge of choosing and running the properties.
2. Who is allowed to take part?
REITs are traded on the stock market, so investors must have a Demat account in order to buy them. In a July 2021 announcement, SEBI lowered the minimum investment in an Initial Public Offering from Rs 50,000 to Rs 10,000–Rs 15,000. This was done to make REITs more accessible and allow more people to take part (IPO). SEBI has also cut the minimum lot size from a hundred units to one unit.
3. Why investing in REITs is a good idea
Through REITs, a small investor can buy a piece of commercial real estate with a small amount of money. Real estate investment trusts (REITs) give investors more options than traditional real estate investments because they can be sold on the open market for a profit, just like stocks.
SEBI says that REITs must give at least 90% of their net cash flows that can be distributed to investors every six months. At least 80% of the value of a REIT must come from properties that have been finished and are bringing in money. At least 90% of the money made from selling assets must be given back to unitholders.
4. REITs have to pay taxes.
Short-term capital gains (STCG) are made when an investor sells shares of a publicly traded REIT within 36 months of the date they bought or were given the shares. STCG are taxed at a rate of 15%. If you have owned a piece of real estate for less than 24 months, you may have to pay a short-term capital gains tax (STCG) that is based on your tax bracket. Long-term capital gains (LTCG) in REITS would be taxed at 10% on profits over Rs. 1,000,000 after 36 months of owning them.
When it comes to taxing the income that unitholders get from REITs, the rules are not clear and depend on the type of income.
Section 115UA of the IT Act says that REIT income other than interest, dividends, and rental income is not taxed if it is received according to the normal tax rates (tax slabs) set out in that section (23FD).
5. REIT in Indian Market.
REITs have been around for a long time in the United States, but they are still fairly new in India. The first REIT to go public in April 2019 was Blackstone and Embassy Business Park REIT, which was also the largest REIT in Asia in terms of area. Embassy REIT, which has a face value of Rs 300, is now trading at Rs 373. The face value of Brookfield India REIT is Rs 275, but it is now trading at Rs 323, and Raheja’s Mindspace REIT sells for Rs 349.
Unlike stocks, which have gone up and down a lot in the last three years due to the pandemic, REITs have stayed steady. Now that the economy is back to where it was before the pandemic, more companies are likely to start real estate investment trusts (REITs). These changes will be good for investors who want to add more variety to their portfolios.
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