Real Estate Investment Trusts (REITs) are designed for investors seeking exposure to real estate without the complexities of owning physical property. For risk-averse investors, real estate should ideally form only 5–10% of the overall portfolio, and REITs offer a convenient way to gain that exposure without buying a house or a commercial asset outright.
REITs vs physical property
Investing in a REIT is essentially an indirect way to invest in real estate. When you buy a physical property, you typically own a single asset, with an upfront investment of at least ₹25 lakh, even in smaller cities. Ownership also brings responsibilities such as finding tenants, managing maintenance, and handling legal paperwork.
REITs, by contrast, allow investors to participate in a diversified portfolio of income-generating properties without these hassles, while still earning regular rental income. You can start with a relatively small investment and exit by selling units on the stock exchange whenever needed, say experts.
Physical property requires significant capital, involves ongoing expenses, and can take months to sell. REITs, on the other hand, offer liquidity, lower entry barriers, and professional management, making them a practical option for investors looking for steady income with flexibility.
REITs vs Mutual Funds
Investors need to understand the key differences between REITs and mutual funds, particularly in terms of liquidity, taxation, and investment objectives.
Mutual funds offer high liquidity, with redemptions typically processed on a T+1 or T+2 basis and minimal impact costs, allowing quick access to funds. In contrast, SM REITs have limited liquidity, where finding a buyer may take weeks or even months. Forced or urgent exits are often at a discount, which can reduce realised returns. In practical terms, this means mutual fund investments can usually be redeemed within a day or two, while REIT investments may take longer to exit, say experts.
From a taxation perspective, REIT income is taxed on its components: interest income is taxed at the investor’s slab rate, dividends are often tax-exempt, and amortisation benefits can be adjusted against capital gains. Equity mutual funds currently attract a long-term capital gains tax of 12.5% and a short-term capital gains tax of 20%, while new debt mutual funds are taxed at slab rates, experts say.
SM REITs are emerging as another option, particularly suited for mature retail investors seeking portfolio diversification and exposure to both commercial and residential real estate without the need to directly purchase property.
(The writer is a journalist with more than 20 years of experience reporting on real estate, regulatory and urban issues.)
