In 1960, Congress created REIT to make it possible for private investors to own large-scale, income-producing real estate.
Individual investors can participate in the revenue generated by commercial real estate ownership through real estate investment trusts without purchasing any actual commercial real estate. Now, the question might arise ‘How does a REIT work?’ Let’s explore the answers with this article.
What is a REIT?
A real estate investment trust, or REIT, is a type of real estate investment trust that owns and operates income-generating properties.
Real estate is a good investment option because it allows you to diversify your portfolio beyond bonds and stocks. Additionally, REIT shares are attractive due to their two characteristics:
- Strong dividend
- Long-term capital appreciation
This investment option allows both big and small investors to invest their money in REITs and earn profits accordingly. Small investors might combine their funds with those of other investors to invest more in significant commercial real estate projects.
Properties included in a real estate investment trust (REIT) are:
- Data centers
- Healthcare facilities
- Housing complexes and other properties
Now that we understand what are REITSs, let’s see why they make a potentially great investment opportunity, as well.
Top 10 REIT Stocks to Invest in India in 2024
Here is a curated list of the best real estate stocks in India in 2024:
|Name of the Compsny
|Market Cap (in Cr)
|Oberoi Realty Ltd
|Godrej Properties Ltd
|Prestige Estates Projects Ltd
|Brigade Enterprises Ltd
|Mahindra Lifespace Developers Ltd
|Sunteck Realty Ltd
|Embassy Office Parks REIT
Note: The data in the list is from 24th January 2024. However, for real-time updates on stock prices and market trends, visit the smallcase stocks collection today!
Please note that the above list is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing.
Overview of the Top 10 REIT Stocks
Here is a brief overview of the top 10 stocks in the real estate sectors, from the listed real estate companies above:
In the past 12 months, DLF (NSE) generated Rs. 5,721.77 Cr. in operating revenue. While the -2% annual revenue de-growth requires attention, the impressive pre-tax margin stands at 26%. The ROE, currently at 5%, indicates room for improvement. It is one of the best REITs to invest in India in 2024.
Oberoi Realty Limited
Oberoi Realty generated an impressive operating revenue of Rs. 4,718.27 Cr. in the last 12 months. Notably, the company achieved an outstanding annual revenue growth of 56%, boasting a pre-tax margin of 48% and a commendable return on equity (ROE) of 15%, making it one of the best REIT stocks in India.
Godrej Properties LTD
Godrej Properties generated an impressive operating revenue of Rs. 3,121.59 Cr. in the last 12 months. With a remarkable annual revenue growth of 18%, the pre-tax margin stands at a commendable 37%. However, there is room for improvement in the ROE, which currently stands at 6%.Yet, it is one of the best REIT to Invest in India.
Prestige Estates Projects LTD
Prestige Estates Prjs. generated an impressive Rs. 8,866.10 Cr. in operating revenue over the past 12 months, showcasing a remarkable annual growth rate of 33%. The pre-tax margin stands at a commendable 17%, while the ROE is currently at 9%, suggesting room for improvement. However it is still one of the best REIT in India.
Sobha generated an impressive operating revenue of Rs. 3,727.25 Cr. in the last 12 months, showing a remarkable annual growth of 21%. While the ROE stands at a fair 4%, both the pre-tax margin and ROE could benefit from improvements, standing at 4% and 4% respectively. However, it is still considered one of the best REIT Stocks India.
Phoenix Mills LTD
Phoenix Mills generated an impressive operating revenue of Rs. 3,098.53 Cr. in the last 12 months, with an outstanding annual growth rate of 77%. Achieving a pre-tax margin of 63% and a commendable ROE of 15% reflects the company’s financial strength. It is one of the top REIT companies in India.
Brigade Enterprises LTD
Brigade Enterprises, listed on the NSE, boasts an impressive operating revenue of Rs. 3,683.43 Cr. in the past year. The noteworthy 16% annual revenue growth is commendable. However, the pre-tax margin stands at 8%, which is satisfactory, and the ROE is at 9%, indicating room for improvement.
Mahindra Lifespace Developers LTD
Mahindra Lifespace Developers (NSE) generated a noteworthy operating revenue of Rs. 558.08 Cr. in the last 12 months, reflecting an impressive annual growth rate of 62%. While the ROE stands at a fair 5%, there is room for improvement. The pre-tax margin, currently at -2%, requires attention for enhancement.
Sunteck Realty LTD
Sunteck Realty’s latest financials show an operating revenue of Rs. 233.71 Cr. over the past 12 months. However, there’s room for enhancement, given a concerning -27% annual revenue de-growth, a pre-tax margin at -1%, and a lackluster ROE standing at 0%. Improvements are necessary across these financial metrics.
Embassy Office Parks REIT
Embassy Office Parks REIT generated an impressive operating revenue of Rs. 3,656.62 Cr. in the last 12 months. With a remarkable annual revenue growth rate of 15%, a commendable pre-tax margin of 17%, and a fair but improvable return on equity (ROE) at 2%, there’s room for enhancement in the latter.
Why Invest in a Real Estate Investment Trust (REIT)?
REITs offer a mechanism for private investors to share in the revenue generated by commercial real estate without actually going out and purchasing the commercial real estate.
REITs provide investors with a consistent income stream by investing in properties that generate consistent rental income. This makes them less risky in comparison with other financial instruments.
The best part about REIT investing is that they provide the benefit of diversification without worrying about the ownership and maintenance of immovable properties.
So let’s dive in!
Types of REITs
The following are the types of real estate investments that you can try to invest in REIT India.
Equity is one of the most popular types of REITs. Mostly, it focuses on running and overseeing commercial buildings that produce income. Moreover, rent is a typical source of income in this area.
Mortgage REITs, commonly known as “mREITs,” are associated with lending money to proprietors and extending mortgage facilities. These REITs make money by charging interest on the money they lend to business owners.
Hybrid REITs allow investors to diversify their portfolios by investing in both equity and mortgage REITs. Here, both rent and interest are the primary sources of income for investors.
Private REITs are real estate funds or companies that are not traded on National Securities Exchange and are also not registered with the SEBI. Only institutional investors can purchase or invest in these REITs.
Publicly traded REITs
Real estate investment trust shares are traded on the National Securities Exchange and registered with the SEBI (Securities & Exchange Board of India). These shares can be purchased by individual investors through the NSE.
Public non-traded REITs
Non-traded REITs that are publicly traded are not traded on the National Stock Exchange but are registered with SEBI. These REITs are more stable because they don’t get affected by market fluctuations.
How to Invest in REIT in India?
Let us now explore how to invest in real estate investment trusts and how to buy REIT in India. Real estate investment trusts are frequently traded and listed on stock exchanges. These listed REITs stock in India make attractive investments. Hence, you need a DEMAT account to invest in real estate investment trusts.
In India, you can invest in REITs India, in three ways:
1) Equity: REIT stocks India and REITs mutual funds provide investors with a way to invest in the real estate market without purchasing individual properties. Additionally, REIT stocks are often considered more liquid and diversified than direct real estate investments.
2) Mutual Funds: REIT mutual funds are a type of mutual fund that invests in real estate investment trusts (REITs) and other real estate securities. These REITs stocks sand funds are managed by professional portfolio managers who use their expertise to select and manage a diversified portfolio of REITs shares in India and other real estate-related securities.
3) ETFs or Exchange Traded Funds: REIT ETFs are a type of investment fund that invests in a diversified portfolio of real estate investment trusts and other real estate-related securities.Note: Each type of REIT operates differently and may have different risk profiles, potential returns, and share prices. Hence, now that you know how to invest in REITs in India, before investing in REIT shares in India, it’s important to carefully consider your investment objectives, risk tolerance, and the specific characteristics of the real estate investment trust stocks.
However, if you’re confused about which stocks to pick, you can explore smallcases:
- smallcases are readymade portfolios of stocks/ETFs, that are based on a theme idea or strategy
- They’re created and managed by SEBI-registered experts
- smallcase.com offers over 200+ stock portfolios, created by 180+ managers
- Some of the popular smallcases among new investors are as follows:
Disclosures for aforementioned smallcases
Factors to Consider Before Investing in REITs
1) No Tax Benefit: The REIT dividends earned through the trust is subject to tax.
2) Highly volatile: The majority of REITs investment in India get affected by market fluctuations. Therefore, risk-averse investors should analyze the investment’s return-generating capacity before investing.
3) Low capital appreciation: In the case of a REIT real estate investment trust, the likelihood of capital appreciation is quite low. This is because they only reinvest 10% of their earnings and return about 90% to investors.
Key Features of REIT Stocks
Real Estate Investment Trusts, commonly known as REITs, present distinct features that make them a noteworthy investment option.
- Real Estate Exposure: REITs offer investors a way to indirectly invest in real estate without the need for direct property ownership. This allows for diversification without the challenges of property management.
- Regular Income Streams: One of the defining features of REITs is their obligation to distribute a significant portion of their income as dividends. This characteristic makes them an attractive option for investors seeking consistent income.
- Liquidity and Accessibility: Unlike physical real estate, REITs provide liquidity as they are traded on stock exchanges. This makes them easily accessible for investors looking to buy or sell without the complexities of property transactions.
- Professional Management: REITs are managed by experienced professionals who handle property acquisition, management, and other operational aspects. This can be appealing to investors who prefer a hands-off approach to real estate investing.
Who Should Invest in REITs?
Investing in Real Estate Investment Trusts (REITs) is suitable for those seeking exposure to real estate without the burden of property ownership. Individuals with a preference for passive income and diversification may find REIT stocks appealing. They are particularly attractive to investors looking for liquidity and flexibility in real estate investments.
Consider REIT Stocks if:
- Diversification is Key: Investors aiming to diversify their portfolio beyond traditional stocks and bonds can explore REITs to add a layer of real estate diversification.
- Passive Income Seekers: Those in search of regular dividends may find REIT stocks appealing, as they are required to distribute a significant portion of their income to shareholders.
- Risk Tolerance Aligns: Investors comfortable with market fluctuations and real estate market dynamics may find REITs a suitable addition to their portfolio, because of their steady risk tolerance.
Risks of Investing in REITs
Investing in Real Estate Investment Trusts (REITs) entails several notable risks that investors should carefully consider.
One key risk involves the potential tax liability associated with REIT dividends. Notably, the majority of REIT dividends do not meet the IRS definition of qualified dividends. As a result, the above-average dividends offered by REITs may be subject to a higher tax rate compared to traditional dividends. This could pose a significant financial consideration for investors, impacting the overall returns from their REIT investment India.
Pass-Through Deduction Complexity
While REITs qualify for the 20% pass-through deduction, the application of this deduction can add complexity to the tax landscape. Investors holding REITs in standard brokerage accounts may find themselves navigating substantial tax obligations despite the deduction. This intricacy emphasizes the importance of a thorough understanding of the tax implications associated with REIT investments, ensuring that investors are well-prepared for potential tax-related challenges.
Interest Rate Sensitivity
Another critical risk factor is the sensitivity of REITs to changes in interest rates. Historically, when the Federal Reserve decides to raise interest rates to manage spending, the prices of REITs tend to decline. Investors need to be mindful of the broader economic environment and potential interest rate fluctuations, as these can significantly impact the performance of their REIT holdings. A proactive approach to monitoring and adapting to changes in interest rates is essential for managing this specific risk.
Beyond general market dynamics, different types of REITs carry unique property-specific risks. For example, Hotel REITs often face challenges during economic downturns, leading to potential underperformance. Investors must conduct thorough research into the specific sector or type of REIT they are considering, understanding the nuances of the associated risks. This tailored approach enables investors to make informed decisions based on the distinct challenges posed by the specific category of REIT in their portfolio.
Advantages of investing in REITs
Real Estate investing can be advantageous. Let’s see how.
1) Diversification: Most of the REITs and real estate mutual funds in India are traded on the National Stock Exchange and provide investors with the opportunity to diversify their portfolios.
2) Liquidity: Since mostly, REIT investment in India is traded on stock exchanges, they provide the advantage of instant liquidity to investors.
3) Steady Cash-flow: Real estate investment trust offer risk-adjusted returns to investors and allow them to maintain a steady cash flow,
4) Transparency: REITs are registered with the Securities and Exchange Board of India (SEBI). Hence, they are regulated, safe, and transparent.
5) Attractive Income: Another major benefit of investing in REITs is that they provide substantial REIT dividend income to investors.
Now, you can also reap benefits of investing in REITs.
To Wrap It Up…
A real estate investment trust offers a steady flow of funds to investors and provides them with the benefits of diversification. Apart from this, you don’t need a huge amount of funds to begin REIT investing. Hence, if you want to diversify your portfolio, you can start investing in REITs.
Moreover, conduct extensive research before making any investment to protect yourself against scammers, and make sure that this investment is only a small portion of your overall portfolio.
1. DLF Ltd
2. Oberoi Realty Limited
3. Godrej Properties LTD
Note: This list is for educational purposes only and is not meant to be recommendatory.
Open a brokerage account, typically a quick process taking just a few minutes. Then, there’s no need to worry about how to buy REITs. Referring to the REIT index is also advisable. Afterward, you can buy and sell publicly traded REITs like any other stock.
REIT investment research firm Nareit states in its mid-year report that, despite macro-economic headwinds, REITs are well-prepared to navigate the ongoing high-interest rate environment due to their strong balance sheets. Investors must consider their investment goals and risk appetite before investing.
As REITs and REIT mutual funds in India own and manage high-value real estate properties, they represent one of the costlier investment avenues. Therefore, investors who choose to invest in REITs typically possess substantial capital. However, one must evaluate their goals and risk appetite before investing.
As REITs must distribute 90% of their annual income as shareholder dividends, they consistently provide some of the stock market’s highest dividend yields. However, one must also remember REIT dividend taxes that would still be applicable. Investors should comprehend both their growth potential and challenges posed by them before investing.
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