Real estate investment trusts (REITs) are an important component when building any equities or fixed-income portfolio. They can give more diversification, potentially higher total returns, and lower overall risk.
In short, their capacity to offer dividend income as well as capital appreciation makes them a perfect companion stocks, bonds, P2P investing and cash.
REITs are real estate investment trusts. Commercial assets which generate income are usually owned/managed by REITs, whether actual properties or mortgages.
You can invest in REITs individually, through an exchange-traded fund, or through a mutual fund. There are various sorts of REITs.
Types of Real Estate Investment Trust (REIT)
In a larger sense, REITs may typically be better categorized based on the types of businesses they engage in. The procedures developed for the sale and acquisition of shares also contribute to the categorization of REITs.
Some common types of REITs are:
- Equity: One of the popular types of REIT is this one. It is typically involved with the operation and management of revenue-generating commercial properties. Here, rents are a common source of income.
- Mortgage: Also known as mREITs, it is mainly involved in lending money to proprietors and granting mortgage facilities. Furthermore, REITs frequently acquire mortgage-backed securities. Interest on loans to businesses is another way mortgage REITs make money.
- Hybrid: Investing in both equity and mortgage REITs diversifies an investor’s portfolio. This type of REIT earns income from both rent and interest.
- Private REITs: These trusts operate as private placements, catering to a select group of investors. They are often not traded on national stock exchanges and but they are not registered with the SEBI.
- Publicly traded REITs: Securities exchanges and SEBI regulate public real estate investment trusts, which issue shares. These shares are available for individual investors to buy and sell on the NSE.
- Public Non traded REITs: These are non-listed REITs that have been registered with the SEBI. National Stock Exchanges do not trade them. Furthermore, when compared to publicly traded, non-traded REITs are less liquid. They are a stable form of investment because they are not affected by market changes.
Advantages of REITs
REITs historically offer investors:
- Competitive Long-Term Performance: REITs have delivered long-term total returns equal to other stocks.
- Stable Dividend Yields: Dividend yields on REITs have historically delivered a consistent source of income in a range of market circumstances.
- Liquidity: Shares of publicly traded REITs are easily exchanged on major stock exchanges.
- Transparency: The performance and the future of listed REITs are monitored by independent directors, analysts, and auditors, as well as the business and financial media. This makes REITs a safe investment option.
- Portfolio Diversification: Unlike other stocks and bonds, REITs provide access to the real estate market.
Cons of investing in REIT stocks
- Illiquid (especially non-traded and private REITs): Publicly traded REITs are easier to acquire and sell than real estate, but as previously said, non-traded REITs and private REITs might be more difficult. To realise potential returns, these REITs must be held for years.
- Heavy debt: REITs also have a lot of debt as a result of their legal status. They are typically among the market’s most indebted corporations. However, investors have grown accustomed to this situation because REITs typically have long-term contracts that generate consistent cash flow — such as leases, which ensure that money is coming in — to comfortably support their debt payments and ensure that dividends are still paid out.
- Low growth and capital appreciation: Because REITs pay out so much of their income as dividends, companies must raise capital by issuing new stock shares and bonds in order to grow. Investors are not always eager to purchase them, such as during a financial crisis or recession. As a result, REITs may be unable to purchase real estate when they desire. When investors are eager to acquire REIT stocks and bonds again, the REIT can continue to grow.
- Tax burden: Dividends distributed by REITs are taxed as ordinary income up to 37% (returning to 39.6% in 2026), plus a 3.8% surtax on investment income.
REITs are an excellent investment vehicle for smaller Investors because they don’t have to deal directly with property developers. Furthermore, they offer lower liquidity risk than direct real estate investment.
REITs are publicly traded on stock exchanges, allowing investors to do their due diligence online and study important details before investing. Moreover, these investments can offer investors a steady source of income through dividend payments. REITs provide a reliable source of dividend income due to the fact that their main source of income is rental payments. Additionally, SEBI regulations and oversight help to mitigate the chances of fraud or deception.
In India, office buildings provide rental yields of 7-9%, with an additional 4-5% capital appreciation potential over the long term. These returns equate to 12-14%, which is higher than the current 10-year government bond yield of 7.5%. Investing in REITs is a great way for investors to gain exposure to these attractive returns.
P2P investing is slowly becoming the preferred option for Indians who are looking to invest their money. It offers higher returns compared to REITs and is more accessible to investors of all levels.
P2P investing has several advantages over REITs for Indian investors. It offers higher returns, more liquidity, and greater control over the investment process. Additionally, P2P investments are not subject to the same regulatory restrictions as REITs, meaning investors can access more diverse opportunities with less risk.