REIT or wrong?

Real estate investment trust (REIT) , when launched, was seen as a godsend for small investors. Before REITs, investing in commercial properties required big bucks. However, the advent of REITs lowered the entry barrier. It promised rental yields from these commercial properties at a fraction of the cost in the form of dividends. Although REIT regulations were enacted in 2014, India's first REIT came into being only five years later. Now that they are in their fifth year of existence, we decided to put the heat on REITs to assess their investment case. The good Structurally, REITs have a firm footing. Even though India's real estate is often dogged by cash crunch and project delays, REITs overcome these issues by having to put at least 80 per cent of investors' money into completed and income-generating commercial projects. It ensures investors expecting a steady stream of income are not left stranded. Furthermore, they must distribute at least 90 per cent of their post-tax earnings as dividends to shareholders. But note that the REIT decides when to distribute the dividends and, therefore, can be irregular. The bad REITs and mutual funds have a few common genes. They collect money from investors and buy income-producing assets. But unlike the stocks owned by equity-oriented mutual funds , the properties bought by REITs are not tradable as easily as stocks. So, they may not be as liquid. That said, REITs are also required to get their property portfolio valued from time to time and calculate their net asset value (NAV) . Thus, there is also an element of capital appreciation that can be tracked. If the value of the underlying assets (properties) increase, NAV increases. The ugly The total market cap of REITs is currently close to Rs 80,000 crore. This is the November 2023 data. On the face of it, REIT's total worth is substantial. But a closer inspection reveals that their trading volume is much lower than even an average small-cap stock. In plain English, although the REIT industry is pretty large, they are not bought and sold very frequently. As such, there is a risk of investors getting stuck with a dud investment. Mor

This article was originally published on December 13, 2023.