Invest In REITs If You Need Regular Income

Real estate investment trusts (REITs) are currently in the news as the Securities and Exchange Board of India (Sebi) Sebi has reclassified them from hybrid to equity instruments.

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This opens up greater possibilities of investment by equity and hybrid funds into REITs. Let us understand the pros and cons of this asset class and whether you should invest directly in them.

Income-generating product

REITs let you own a slice of income-producing real estate—Grade-A offices, malls and, increasingly, emerging segments like warehouses and data centres. They provide access to premium real estate with a relatively small capital outlay.

Investors also don't need to purchase and directly manage real estate or deal with tenants. They gain exposure to professionally managed portfolios and supervision by Sebi.

By regulation, Indian REITs must distribute at least 90 per cent of their cash flows to unitholders. In practice most listed REITs make quarterly payouts. This makes them natural income-generating vehicles. In addition, they also offer potential for capital appreciation from asset revaluations.

Investors can typically expect yields in the 5-7 per cent range. In addition to this income, capital appreciation of about 3-5 per cent annually is possible over the long term, depending on occupancy, rental growth, and broader market conditions.

REITs also offer diversification benefits, since real estate often has a low correlation with other asset classes. Liquidity is another plus: their units trade on stock exchanges, which means investors can sell and exit them anytime.