Real estate investment trusts: 'REIT' move or a risky one?

Summary: REITs are often marketed as an easy way to invest in real estate without requiring large amounts of capital. What rarely gets highlighted is how market-driven they really are. Here, we explain how REITs work and whether they provide portfolio diversification.

Real estate investment trusts, or REITs, are a convenient, low-cost way for investors to get exposure to real estate without requiring huge initial capital. They are mandated to invest at least 80 per cent of the investors' money into completed and income-generating commercial projects. As a result, many investors view REITs as a safe and steady income-generating asset.

However, this is only partly true.

The myth of REITs

REITs earn returns from two sources: regular cash payouts and the current market price of the investment units.

Cash payouts depend on various factors such as the rent collected, occupancy levels and interest costs. Market prices, on the other hand, are determined by the ongoing market sentiment and interest rates.

These two do not always move in tandem. There may be times when you receive steady income but still see your investment's value decline. This surprises investors who expect fixed income-like stability.

REITs are not debt. Income is not fixed. They are not equity either. Growth is limited.

They sit somewhere in between.

Where REITs can be useful

If your portfolio is heavily tilted towards equities, REITs can offer an added layer of diversification. They also provide an opportunity to invest in large commercial real estate without needing the substantial capital required to buy physical property.

Another key advantage is convenience. With REITs, you don’t have to deal with tenant management, lengthy paperwork, or the long lock-in periods that often come with owning real estate directly.

Plus, regulations require REITs to distribute at least 90 per cent of their net distributable cash flows, which can offer investors a degree of comfort on the payout front.

Things you need to be mindful of

Before investing in REITs, it’s important to keep a few key risks in mind.

• Interest rates play a major role in how REITs perform. When rates rise, REIT prices often come under pressure, even if rental income remains steady.
• Concentration risk is another factor. If a REIT relies heavily on a small number of properties or tenants, the exit of even one large tenant can hurt both cash flows and the unit price.
• Borrowing risk also matters. REITs often use debt, and if loans need to be refinanced at higher interest rates, future distributions to investors could take a hit.
• Finally, taxation can be tricky. REIT payouts are made up of different components, each taxed differently. This means headline yields may look attractive, but what ultimately matters is the post-tax return.

Should you consider investing in REITs then?

To reiterate, REITs are a useful addition if you are seeking a low-cost and convenient way to invest in real estate. Used in small amounts, they can add income and diversification to your portfolio.

That said, REITs are not a must-have investment. They should not be seen as a replacement for fixed deposits, and they are definitely not growth or wealth-building assets like equity mutual funds. Thus, for most investors, limiting REIT exposure to around 8 to 10 per cent of the portfolio is sensible.

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Also read: REIT or wrong?

This article was originally published on February 10, 2026.