Know more about REITs

REITs is the abbreviated form of real estate investment trusts. Its concept is similar to that of mutual funds, as in, money is pooled from investors while the investment and subsequent monitoring are done by a professional/fund manager. The difference being that the underlying assets in this case are real estate holdings or loans secured by the real estate. 

In essence, REITs are institutions that either own or lend funds to income-generating real estate properties. Investing in these trusts is a good way to get exposure to the real estate market without having to buy or manage the properties. Let’s now see how REITs work. 

A real estate company forms REIT and becomes its sponsor. The company then appoints a trustee for the trust and thereafter, it no longer controls its real estate holdings. These holdings are controlled by the REIT either directly, or through a special purpose vehicle (SPV), which is a domestic company wherein, the trust owns a stake of 50 per cent and above. It holds the real estate assets on the behalf of the trust. Moreover, a manager is appointed by the trustee for the purpose of managing the assets and taking investment decisions. Post the fulfillment of these pre-requisites, the REIT can now be registered. After registration is completed, the REIT can raise funds from the investors. The units issued by the REITs can be listed on the stock exchanges.  

SEBI has mandated the REITs to invest at least 80 per cent of the funds in commercial properties that can be rented out to generate income. On the other hand, the remaining funds (up to the limit of 20 per cent) can be invested in instruments such as stocks, bonds, cash, or under-construction commercial property. Furthermore, they are required to pay out at least 90 per cent of their net taxable income to the investors by way of dividends and interests.