What Are REITs? Types, Benefits, and Drawbacks Explained

Real estate investment trusts (REITs) have emerged as a practical and accessible way for investors to participate in the property market without owning or managing physical assets. Designed to generate income through real estate investments, REITs are becoming increasingly popular in India as they provide regular returns, diversification, and liquidity in a traditionally illiquid sector.

In this blog, we explore what REITs are, how they work, their types, benefits, risks, and how you can invest in them effectively.

What Are Real Estate Investment Trusts (REITs)?

A real estate investment trust (REIT) is a company or trust that owns, operates, or finances income-generating real estate. These may include commercial properties like office buildings, shopping malls, data centres, and industrial parks. REITs collect rent from these properties and distribute a significant portion of the income as dividends to investors.

REITs were introduced in India by SEBI (Securities and Exchange Board of India) in 2014, and they must adhere to specific regulations—like investing at least 80% of their assets in completed, income-producing properties.

In simple terms, REITs allow you to invest in real estate without having to buy, manage, or sell any physical property.

How Does REIT Investing Work?

When you invest in a REIT, you are essentially buying shares of a company that earns rental income from a pool of commercial real estate. These shares are listed on stock exchanges, and their prices fluctuate like equity stocks.

Here's how REIT investing typically works:

1. You buy REIT units (listed like stocks).

2. REIT manages properties and earns rental income.

3. You receive dividends from rental income and, potentially, capital gains.

4. You can sell units anytime via the stock exchange, offering liquidity.

This structure is particularly attractive for retail investors looking to invest in property with a relatively low capital requirement and minimal hassle.

Types of Real Estate Investment Trusts

REITs can be classified based on their investment focus and operational style:

Equity REITs

They own and operate income-generating real estate, mainly commercial properties. These are the most common type and focus on rental income and property appreciation.

Mortgage REITs (mREITs)

Instead of owning property, they provide loans to real estate developers or purchase existing mortgages. Returns come from interest income.

Hybrid REITs

Combine the features of equity and mortgage REITs, investing in both physical property and real estate loans.

In India, equity REITs are most prevalent and regulated by SEBI.

How to Invest in Real Estate Investment Trusts (REITs) in India

Investing in REITs in India is straightforward. You can:

• Buy REIT units directly from the stock exchange (NSE/BSE) using a demat account and trading platform.

• Participate in REIT IPOs when new REITs are listed.

• Invest via mutual funds or ETFs that track REIT indices (more on this below).

Minimum investment amounts are now more accessible for retail investors, with some REITs allowing investments from as low as ₹10,000.

Real Estate Investment Trust Returns – What to Expect

REITs are income-generating instruments that typically offer two types of returns:

1. Dividend Income

SEBI mandates that REITs must distribute at least 90% of net distributable cash flows to unit holders. These are usually paid quarterly or half-yearly.

2. Capital Appreciation

REIT unit prices may rise over time as the value of underlying properties increases or as rental income grows.

In India, investors can expect annualized returns between 6% to 9%, depending on the REIT and market conditions. However, REIT returns are not fixed and may vary based on occupancy rates, rental agreements, and interest rate movements.

Real Estate Investment Trust Mutual Funds – Another Way to Gain Exposure

For those who prefer indirect exposure, real estate investment trust mutual funds offer a more diversified and managed route.

These funds invest in domestic or international REITs and provide exposure to real estate assets across geographies without the need for managing REIT investments individually.

Key advantages:

• Lower entry barrier

• Managed by professionals

• Potential for diversification beyond Indian real estate

However, like all mutual funds, performance depends on the fund manager's decisions and underlying asset quality.

Key Advantages of REITs for Indian Investors

REITs offer several benefits that make them attractive to both retail and institutional investors:

Regular Income Stream

Through consistent dividend payouts from rental income.

Liquidity

Listed REITs are traded on exchanges, allowing easy buy/sell opportunities unlike traditional real estate.

Low Entry Point

Investors can start with small amounts compared to the crores needed for direct property investment.

Diversification

Access to a professionally managed portfolio of high-grade commercial properties.

Transparency and Regulation

SEBI-regulated REITs provide regular disclosures and ensure fair practices.

Limitations and Risks of REIT Investing

Despite their advantages, REITs are not risk-free:

Market Volatility

REIT units can be affected by broader market movements and investor sentiment.

Interest Rate Sensitivity

REITs may underperform when interest rates rise, as bond yields become more attractive comparatively.

Property Market Risks

Vacancy rates, declining rental yields, or economic slowdowns can impact returns.

Limited Capital Appreciation

REITs focus more on income than rapid capital gains, which may not appeal to aggressive investors.

Understanding these risks helps align REIT investing with your personal financial goals.

Who Should Consider Investing in REITs?

REITs are best suited for:

• Investors seeking regular income through dividends.

• Those who want real estate exposure without buying physical assets.

• People looking for liquid investment options in the property sector.

• Conservative investors seeking moderate risk and stable returns.

• Diversifiers aiming to reduce dependence on equities and fixed income instruments.

If you’re a new investor, REITs can be a smart starting point for diversifying into real estate with minimal capital.

Conclusion

Real estate investment trusts (REITs) offer a practical, low-cost, and liquid way to invest in commercial real estate. With income stability, regulatory safeguards, and market accessibility, REITs are gradually finding their place in the Indian investor’s portfolio.

While they are not immune to risks, REITs present a compelling alternative to traditional real estate ownership. Whether through direct investment or real estate investment trust mutual funds, REITs can help you balance your portfolio with real asset exposure.