REIT vs Physical Real Estate

Real Estate Investment Trust (REIT) is a new asset class in recent years in the Indian market that gives investors a chance to get exposure to real estate. They can invest in REITs without incurring the substantial cash flows required for physical real estate. This article has covered the differences between REIT vs Physical Real Estate.

What is REIT in India?

Real Estate Investment Trust (REIT) is a financial instrument that pools money from multiple investors and invests in buying income-generating real estate properties. These properties may be office spaces, malls, hotels, warehouses, etc. In other words, REITS work very similarly to mutual funds. However, Indian REITs focus only on office properties. 

SEBI mandates to invest 80% of their money in income and rent generating properties. They have to distribute 90% of their income to unit holders as dividends or interest income. REITs can earn regular income through dividends. The minimum investment is Rs.10,000-Rs.15,000 with one lot size of one unit. This encouraged listings in India. 

There are only three REITs in India, namely,  Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust. Also, SEBI registers and approves these REITs. They primarily operate in commercial real estate, predominantly office spaces. Furthermore, all three REITs in India have a strong presence in their respective regions of operations. 

For example, Embassy Office Park REIT is the largest among the commercial properties in the Bangalore region in prime locations. Similarly, Brookfield India Real Estate Trust has more than 10 million square feet of income-generating properties spread over Noida, Gurugram, Kolkata, and Mumbai. Despite the recent Covid-19 pandemic, the listed REITs in India continued to pay regular interest and dividend income each quarter. 

REIT vs Physical Real Estate – What is the Difference?

The following are the differences between REITs and Physical Real Estate – 

Diversification

One of the significant differences between the two is that investors do not have to buy the entire property in REITs. They only have to buy the trust units (like mutual funds). Hence, they can buy different units of trusts and diversify their portfolio. On the other hand, investors have to buy the entire property for investment in physical real estate. Therefore, they would require an additional lump sum amount for new property investment. 

Investment Amount

As per SEBI, the minimum investment amount for REITs is Rs.10,000-Rs.15,000 with one lot size of one unit. Therefore, even small investors can easily afford this amount. But, conversely, a one-time lump sum amount is required to buy physical real estate. 

Liquidity

REITs are traded on stock exchanges. As a result, it becomes easy to buy and sell units. On the contrary, it isn’t easy to sell physical real estate property unless a buyer is found. 

Ownership

In the case of REITs, investors do not get the ownership of the property. They only get units of the trust. However, real estate gives right to the property that investors can use however they want.

Costs

There are various costs involved in the upkeep of the physical property like maintenance cost, property tax, water tax, registration cost, etc. However, REITs do not involve these costs. 

Time Consuming

While investing in real estate, the property can be cancelled or delayed to permission issues. It can be time-consuming as there is other legal paperwork. REITs are only simple buying and selling units on the stock exchange. You have no hassle buying, maintaining or registering them. 

Income

REITs give regular dividends, which is not the case in physical real estate unless it is given for rent and receives a rental income. 

Taxation

Most property buyers prefer financing a house property through a home loan. b. Therefore, there are certain tax benefits available. On the other hand, REITs do not offer anything like this, and even the dividends are taxable. 

Who Should Invest in REIT?

REITs are real estate investments that help diversify their investment portfolio. Thus, investors looking for assets other than stocks and bonds can consider investing in real estate investment trusts. 

It is a more straightforward approach to real estate investment than physical real estate. Therefore, investors can easily purchase shares of their choice as an investment. In addition, since REITs manage the property, investors are not burdened with the stress of vacancy, tenants, repairs or management.

Furthermore, REITs pay regular income in the form of a dividend. Therefore, this can be suitable for investors looking for a steady income. Also, REITs can be a suitable option for investors who want exposure to real estate for investment purposes. 

Who Should Invest in Physical Real Estate?

Physical Real Estate investments are suitable for investors who want a more personalised experience. From the time to buying the property, managing it, and selling it gives them the project’s experience and assessment of returns. 

Also, they have complete creative and management control over their property. Furthermore, taking a home loan against real estate helps investors enjoy certain tax benefits for the long term. However, investors should remember that physical real estate investments are long term as they cannot be easily bought or sold. Also, if the purchase is for a home, and the initial down payment is ready, this can be a suitable option. 

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