Difference between direct real estate investing and REITs
- In REITs, investors invest in a diversified portfolio of commercial real estate assets. With the direct investment route for commercial office space, investors invest in a single office building.
- Individual investors can profit from real estate through REITs without having to own or manage real assets.
- Direct real estate offers higher tax advantages than REITs and gives investors more decision-making power.
- REITs are easier to buy and sell than traditional real estate because many are publicly traded.
The difference in returns for real estate investing and REITs
There is a significant difference between the returns of the two investments:
- We can expect a realistic return on investment from REITs in the range of 7-8% per annum, after adjusting the management fees of the management fund.
- With REITs, the return on investment will be highly structured, realistic and low risk. REITs are ideal for investors who want stable income with minimal risk.
- REITs are required to distribute at least 90% of taxable income to shareholders, and dividend yields of 5% or more are very common.
- During times of inflation, the value of real estate tends to increase as real estate prices and rents rise, providing better returns for REIT investors.
How Do REIT Investors Get Returns?
REITs, like any other business, need capital. REITs create money by renting, leasing or selling the assets they buy. The shareholders elect a board of directors, which is responsible for selecting investments and recruiting a team to supervise them on a day-to-day basis. FFO, which stands for Funds From Operations, is the most common way to calculate REIT earnings.
There are two types of income that REIT investors can earn:
- Capital gains subsequent to the sale of REIT units
- Dividend income
REITs will be an excellent choice for investors who wish to diversify their portfolios beyond the gold and equity markets. This is a good place to invest your money if you are a first-time real estate investor looking to diversify your portfolio without taking too much risk.
If you desire cash flow, tax incentives to offset that income, and high earning potential, direct real estate investing may be a preferable alternative. It’s also a great option if you want more control over your money and prefer a hands-on approach.
REITs are a good option for investors who may not be interested in managing or operating real estate, as well as those who do not have the funds or cannot obtain financing to do so. REITs are also a great way for new real estate investors to learn about the business.
Individual investors can invest in the income generated by owning commercial real estate with REITs, without having to purchase commercial real estate themselves.
Is it still too early to invest in REITs?
REITs have already been introduced in India and investors have recorded excellent returns. The success of REIT’s offering in India has sparked interest in this new investment vehicle, and we expect more REIT listings to follow soon.
Embassy Office Parks REIT, Mindspace Business Parks REIT and Brookfield India Real Estate Trust are the only three REITs currently eligible to invest in India.
To note – Read all documents, terms and conditions before going ahead with the decision to invest in REITs. Do your research before investing.