REIT vs Physical Real Estate Investment: Which Is Better?

The most important benefit of REIT is that it allows retail investors to put their money in commercial properties.

REIT vs Physical Real Estate Investment: Which Is Better?

A Real Estate Investment Trust (REIT) is an entity that owns, operates or finances a pool of real estate assets that are held like a mutual fund. Much like a mutual fund collects money from investors and invests it in the stock market, a REIT too sources money from retail and institutional investors and channels these funds to help create more real estate assets. A REIT is currently allowed to invest only in commercial properties in India. With the government focusing on creating physical infrastructure like highways, bridges and buildings, experts say it is a good time to invest in REITs.

How is REIT formed?

There are some conditions that a company needs to fulfil to qualify as a REIT. Some of them are: It must have an asset base of at least Rs 500 crore and has to invest 80% of the money sourced from investors in revenue-generating properties. The company must distribute 90% of its income to investors as dividends. It can make 10% of the total investment in under-construction real estate.

Why REITs?

The most important benefit of a REIT is that it allows retail investors to put their money in commercial properties, which have traditionally attracted investors who had deep pockets. Investing in residential properties over the past decade have yielded fewer returns for investors than commercial ones. Since REITs pool resources from many investors and diverse groups, they are deemed a relatively safer investment option over physical real-estate.

With REIT, you don't have to scour the market to find the right property to put your money in and just invest in the company which will channel your money to real-estate funds for you.

However, experts say the pandemic may have had an adverse impact on REITs, which are a  relatively new concept in India. REITs can invest only in commercial properties, including office spaces that can generate a regular stream of revenue, and most companies have allowed their employees to work from home due to the pandemic. This has put a question mark on the demand for office spaces and the future of REITs.

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