Understanding What Is a REIT and Exploring The Different Types
by Ankita Tripathy Real Estate 29 June 2024
When it comes to growing your income, nothing caters better than a real estate matter. The never-ending development keeps alluring the minds of various investors. You’ll be surprised to know that almost 80% of them want to diversify their portfolios, keeping conventional stocks at bay. Let’s find out what is REIT and its benefits.
Sadly, it’s no child’s play, like owning a property or other financial substitutes. Issues like logistical complexities, hefty price tags, and commitment to maintenance and operation may pose challenges to investors.
It is practical to say that there is a crater between owning a property like a house and a building or an entire 20-acre campus. Hence, for a single investor, this investment could be too ambitious, to say the least.
Individuals can use the Real Estate Investment Trust or REIT to facilitate these kinds of investments in larger-than-life properties. So, let’s try to understand the concept and the whereabouts of REIT. This will help its viability as an investment vehicle.
What Is REIT?
A real estate investment trust is an organization that owns, operates, and finances real estate that generates earnings.
REITs have global acceptance. They are also liquid, highly governed, and tax efficient, allowing investors to invest in real estate through a publicly traded unit.
They allow investors to garner dividends from these large-scale real estate ventures. Here, the individual does not need to invest in the properties themselves directly.
REITs offer space in lease and thereafter collect rent on these properties. The unit holders of these properties generate their shared income from these properties.
In India (SEBI), oversees the activities of the REITs with the help of their structural framework. SEBI’s involvement helps safeguard the interests of unitholders.
What Are The 6 Types Of REITs And How To Invest In Them?
REIT investment requires a comprehensive understanding of the various types available. The selection should always be correct when it comes to selecting your risk tolerance.
However, here is a breakdown of the diverse types of real estate investment trusts and their approach to investment.
1. Equity REITs
Equity REIT, being a prevalent type, is something less-talked about. They invest in the ownership and operation of income-producing properties. Moreover, the assets generate continual income through tenant leases.
They cover a wide range of real estate, from retail centers to office parks and, finally, residential apartment complexes.
You can consider them vehicles for long-term investment where you extract dividends generated from rental earnings and the potential appreciation of the assets they own.
Investing In An Equity REIT
- Directly purchase shares directly through your DEMAT/brokerage account.
- Invest in mutual or exchange-traded funds (ETFs) that specialize in REITs.
- They provide broad market exposure focusing on indices composed of REIT stocks.
2. Mortgage REITs
Mortgage REITs (mREITs) do not have direct ownership of the properties. Sadly, mREITs loan money or make investment mortgages or mortgage-backed securities by focusing on the financing.
The interest on these financial assets is the source of earnings. This is a type of real estate investment trust that often offers higher dividends but is more sensitive to interest rate fluctuations. This can affect their borrowing cost and the value of mortgage-backed securities.
Investing In A Mortgage REIT
- One can own the mREITs with the help of a DEMAT/brokerage account.
- Interest rate hedging strategies can curb the volatility of mREITs.
- Investment diversification across different mREITs can bring down the impact of interest rate volatility.
3. Hybrid REITs
Hybrid REITs integrate equity and mortgage REIT strategies. Moreover, they diversify their portfolios with the help of both physical assets and mortgage asset investments. Consequently, they create an adaptable investment that can capitalize on rental earnings from interest on mortgages and owned real estate.
This approach helps nullify the risks attached to solely owning property or financing mortgages.
However, Hybrid REITs are a type of REIT that benefits from rental income stability and the potentially higher returns from mortgage interest.
Investing In Hybrid REITs
- The shares of Hybrid REITs can also be acquired through DEMAT/brokerage accounts.
- Diversifying the investment portfolio, they offer a balanced investment opportunity.
4. Private REITs
Investors do not trade private REITs on public stock exchanges or register with SEBI. They can be found with institutional investors or through private placements.
The ROI is strong with the private REIT. However, you have some higher risks and lower liquidity associated with the investment. Investors who are no longer comfortable with longer-term commitments and less regulatory oversight can go with the Private REITs.
Investing in a Private REIT
- Investment typically occurs through private placements and requires accredited investors.
- Investors can directly engage with the REIT through a private equity firm.
5. Publicly Traded REITs
The major stock exchanges do not enlist publicly traded REITs. Actually, SEBI regulates them. Just like the other publicly traded stocks, you can purchase and sell these REITs. They offer both transparency and liquidity.
Moreover, publicly traded REITs offer steady and continuous earnings through dividends and are easy to include in a diversified investment portfolio.
Investors can access these publicly-traded REITs, which is why they are a popular choice for those seeking income and liquidity.
Investing In A Publicly Traded REIT
- Take the assistance of the broker while buying these stocks. You can simply do it by buying them on the stock exchange they’re listed on.
- Investors can regularly invest fixed amounts in REITs. By doing this, they can benefit from the principle of rupee-cost averaging. It’s the same as investing in Systematic Investment Plans (SIPs)
6. Publicly Non-Traded REITs
SEBI registers these publicly non-traded REITs, which do not trade on NSE or BSE. Moreover, these REITs offer some benefits of public REITs, like regulatory oversight.
They have a potential for high income.
However, they do not offer liquidity like publicly traded REITs. However, these REITs are also more stable. This is because they do not fluctuate on the stock market.
Investing in a Publicly Non-traded REIT
- The broker-dealers and financial advisors sell them.
- Investors in non-traded REITs should be prepared for a longer investment period and less flexibility in selling their shares.
The Gateway To Real Estate Investment
REITs have been an effective channel to simplify real estate investment entry. Investors can manage risk and reward through different REIT types, gaining diverse opportunities.
As the real estate sector continues to evolve, developing an understanding of the REIT nuances can empower investors to earn steady earrings, and that too minus owning, operating and managing these properties themselves.
Frequently Asked Questions (FAQs)!!
Ans: Equity REITs and mortgage REITs are the two principal types of REITs. The former owns and manages and owns the real estate properties. Besides, they also generate steady earnings by leasing space and collecting rent on properties.
On the other hand, mortgage REITs primarily directly lend to owners and operators or purchase existing mortgage securities.
Ans: Hybrid REITs strike a balance between their investment portfolios by closely monitoring the estate mortgage and physical properties. This approach allows them to diversify their revenue sources, maximizing rental income return while mitigating risks with interest-earning mortgages.
Ans: REITs’ inclusion in the investment portfolio is one of the linear approaches to diversify investments. Moreover, it offers exposure to the real estate sector, which, more often than not, behaves in a different way compared to the typical stock markets.
As such, it is a good option for investors who want to attain a stable income stream and smooth out the volatility of their investment returns.
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