Real estate investment trusts or REITs are like mutual funds for the real estate sector. They collect funds from investors and put the money into real estate. The returns they earn from rental income and sale of property is distributed as dividends to investors. So retail investors can now invest in real estate without spending large sums of money. Plus REITs are listed on the exchange and can be freely bought and sold, so liquidity is pretty high too.
REIT investing is still in its infancy in India since the first REIT came into being only in March 2019. But the road is open for others to follow. REITs can be a good investment opportunity, so you should know how to invest in REIT in India. Here are some pointers on how to invest in REITs, how much to invest in REITs etc.
1. IPOs: A new REIT comes out with an initial public offer (IPO) open to investors. You can apply for the IPO, and if your application is accepted you will be allotted units in the REIT. According to Securities & Exchange Board of India (SEBI) regulations, you will have to invest a minimum of Rs 2 lakh in the REIT.
2. Secondary market: After the IPO, the REIT will be available on the secondary market. That is, it will be listed on the stock exchange like shares. You can purchase them on the stock market too.
3. Choosing the right REIT: Like shares or equity funds, REITs are subject to market risk, so you must read the offer document carefully. While the real estate market has good potential, certain segments, like in some metros, could be saturated and scope for appreciation low. Make sure the segments the REIT is investing in has good potential, like some metro suburbs, affordable housing, smaller cities with growing industries etc.
4. Funds from operations (FFO): This is the cash flow of a REIT, calculated by adding depreciation to the REITs earnings, and deducting gains on sales. It is also calculated on a per share basis like FFO per share, similar to earning per share, and used to gauge a REIT’s performance.
5. How much to invest in REIT: That will depend on your risk appetite and investment goals. But REITs should be part of any well-diversified portfolio.