India’s real estate sector is on the uptick again, with investors looking into acquiring properties for a reliable source of passive income. Well-timed transitions in the real estate industry and new regulations in some states can lead to 4% to 6% in rental returns, promising an average return rate of 20% in upcoming years.
Investing in Indian real estate no longer requires a significant capital investment. For as low as Rs 100-Rs 400 per unit, locals and foreigners can invest in commercial real estate in India without purchasing a property outright, using real estate investment trusts (REIT). A REIT is a company that manages various income-generating properties and allows investors to buy shares in them and earn dividends. Trading stocks in these REITs and other real estate companies online has been made convenient by brokerages, further making the real estate market accessible. Now, one can trade stocks without commission at the click of a button anywhere in the world. Investors interested in real estate could enjoy swap-free trading on stocks from the American Tower Corporation (AMTm) REIT and Equinix, Inc. (EQIXm).
While you could invest directly in properties, these tangible, non-volatile assets come with a cost. One must reckon with the daily responsibilities of being a landlord or property owner. This may be why real estate stocks are gaining momentum among forward-thinking Indians who want to put their money in a familiar industry, albeit in an easier way. But before you join the 1.2 lakh Indian investors who have put their money in REITs, here are a few things to consider first:
Property types
Different REIT companies hold different varieties of property types. For instance, in the next 18 months, India will see four new listings for REITs that are backed by office and shopping mall properties. REITs like this are in the retail circle. Equity REITs mainly operate in hotels or offices, and healthcare REITs focus on hospitals and clinics. These are just some examples. Before committing to a REIT, thoroughly research the current market conditions surrounding the tenants’ respective industries. For example, if shopping for clothing online is more popular than going to physical stores in a particular city, investing in a retail REIT whose tenants are primarily clothing stores may prove less profitable.
Location, location, location
Second, you’ll want to check on the locations of each property. When assets are concentrated in one city, it can be dangerous since they would be subject to the same state regulations. It’s generally better to have an asset portfolio that’s geographically spread out so that failing market conditions in one area don’t affect the entire REIT. If you’re interested in investing in the potential of a single area, consider looking for a REIT with a diversified portfolio across various sectors. This way, you avoid having to rely on a single industry’s success and lower your investment’s riskiness.
Occupancy rates
Third, look at the occupancy ratio of the property. A higher occupancy ratio would naturally generate more income, while a lower occupancy means the property may not be doing so well, rendering the REIT more volatile. Aside from occupancy rates, looking at each tenant’s contract terms would be best. Shorter lease periods could be riskier than ten- or 15-year leases. This is where property type may also come into play – for instance, hospitals and offices tend to occupy spaces longer than retail shops.
Risk aversion
Finally, assess whether you are okay with some possible drawbacks of REITs, such as potentially slower capital appreciation. Because 90% of profits go back to investors, only 10% is used for reinvestment to improve or maintain the properties, which may affect their value. Like other non-tangible stocks, REITs are vulnerable to fluctuations and market trends, affecting their value as well. In addition, both long- and short-term capital gains are subject to taxation. A last consideration is your preferred level of involvement and control over certain risks. Unlike landlords, REIT investors have little control over how properties are managed. So, if you choose to closely look after a property regarding maintenance and improvement, then a REIT may not be ideal for you.
Investing in the real estate industry is a tried and true way to grow your hard-earned money, but as with all things, proper research and analysis are essential. With the right strategy, you should see satisfactory dividends in your future.
