Investors come in all forms – The brave, the risk-averse, the adrenalin-addicted – you name it and you will find them. While some people are happy to take the plunge and invest in real estate, others are just not able to find convincing enough reasons to do so. Yet, the traditional wisdom that realty is the wisest form of investment is hard to shake off.
So what is one to do in such situations? Well, one option is to invest in Real Estate Investment Trusts (REITs).
What are REITs?
REITs work in a manner similar to mutual funds except that they issue units to their investors. The money is invested in completed commercial projects that are expected to generate returns. The REIT is expected to be registered and to raise funds via an IPO. REIT units are listed on exchanges and traded just like securities.
How do they compare with real estate?
To the uninitiated, both options may seem alike but there are significant differences in the nature of investments. Take a look at the comparison below:
Entry:
Real Estate requires significant investment
REIT: Low entry barrier of Rs 2 lakh (primary market)
Nature of Asset:
Real Estate – Illiquid
REIT – Relatively more liquid
Safety of Investment:
Real Estate – Depends on credibility of builder, broker etc
REIT – Are regulated by SEBI and have safeguards in place to protect investors
Volatility in value:
Real Estate – Dependent on market trends
REIT – Somewhat less volatile due to diversified portfolios; however, still may experience NAV changes
Returns:
Real Estate – Two forms: rent and capital gains from sale. Market trends drive both rental and sale value
REIT – Two forms: dividends (from rental income minus asset management fee) and capital gains (where NAV is estimated and not accurate like MF). Dependent on market trends as well as prowess of portfolio manager.
Both direct real estate investment and investing in REITs have their own benefits and drawbacks.
Points to consider
Both options are driven by the state of the real estate market. Therefore, expecting high returns from REITs when the market is sluggish will not bear fruit. There is a fine line of difference between the two options and therefore, should be matched to your individual requirements. Although investing in REITs doesn’t require as much as purchasing property, it is still important to carefully examine all sides before taking the plunge.