REITs: The right way to invest in real estate?

REITs offer exposure to commercial real estate minus the ownership hassles. But do the potential risks outweigh the rewards?

In 2019, when the first REIT was introduced in India, it was considered a blessing for small investors. Prior to that, you needed big bucks to buy your way into the commercial real estate market.

Much like how stocks enable you to buy portions of businesses, REITs allow you to gain exposure to a portion of income-generating real estate projects. Since they invest in commercial real estate rather than residential real estate, you can expect 2-3 times higher rental yields.

It is a quintessential example of turning an illiquid asset like real estate into a liquid one. That said, on the liquidity front, these investments aren’t without their flaws.

About REITs

First introduced in 1960 in the US, REITs were designed to let investors participate in the post-war property boom. Back then, skyscrapers, shopping malls, and apartment complexes were springing up everywhere, and REITs gave small investors a chance to gain exposure to these large-scale projects. They also provided real estate developers with much-needed capital.

The idea took off, and India got its own set of REIT regulations back in 2014. However, as mentioned, the first REIT came much later – after 5 years. The key difference between an American REIT and an Indian REIT is that the latter invests a higher percentage in commercial real estate – at least 80 per cent of investor money.

At its core, a REIT (Real Estate Investment Trust) is a company that owns, operates, or finances commercial real estate. These companies allow you to invest in a pool of such real estate assets, just like you would invest in any other publicly traded stock. In simple words, you buy shares of a REIT, and the REIT invests that money in various real estate projects.

Simply put, no more shelling out hefty amounts of cash to finance a real estate project of your choice. Also, no more money spent on keeping the property in shape. You can simply invest in REITs through stock exchanges.

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How do REITs work?

The underlying properties of REITs generate rental income, and this income is distributed to investors in the form of dividends. In some cases, REITs may also benefit from capital appreciation as property values pick up pace over time.

The way a REIT operates is straightforward:

1. Property acquisition: The REIT buys commercial real estate, either through direct purchase or joint ventures.
2. Rental income: The properties generate rental income. For example, office spaces or retail outlets in shopping malls pay rent. And that rent then reaches you, the investor.
3. Distribution: The REIT distributes a significant portion of the rental income to its shareholders as dividends. By law, REITs must distribute at least 90 per cent of their taxable income to investors.

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The risk of investing in REITs

While the minimum investment requirement of Rs 10,000-Rs 15,000 is much lower than that of buying a complete real estate unit, a key concern remains.

The combined market cap of the Indian REIT market is about Rs 98,000 crore (as of May 14, 2025). This is a sizable sum, but the liquidity of a REIT is much less than that of an average small-cap stock.

In simple words, the REIT industry is quite large. However, the trading volumes are so low that you may be unable to sell a dud investment.

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Conclusion

REITs offer a convenient way to participate in India’s growing commercial real estate market. For income-seeking investors, they can provide a steady dividend stream. However, liquidity concerns and sector-specific risks mean REITs are best treated as a supplementary investment.

We recommend limiting exposure to 8-10 per cent of your overall portfolio. Ensure you review the underlying assets, occupancy rates, and management quality of any REIT before investing.

FAQs

1. What are REITs?
   REITs are companies that own, operate, or finance income-generating real estate and allow investors to buy shares of the trust listed on stock exchanges.
2. How do REITs work?
   REITs generate rental income from commercial properties and distribute most of this income to shareholders as dividends. They may also benefit from property value appreciation.
3. Are REITs safe investments?
   While REITs provide a diversified approach to investing in real estate, there are still liquidity issues that you have to be wary about.

Also read: Not the REIT stuff yet

This article was originally published on July 07, 2025.