2.5.1 REITs: Real Estate Investment Trusts

Real estate, structured like a security

A REIT pools capital to own and manage a portfolio of commercial properties, then distributes most of the rental income it collects back to unit holders on a regular basis. Units trade on the stock exchange, giving investors a liquidity that owning physical property directly simply does not offer.

A REIT (Real Estate Investment Trust) is a company that owns, operates or finances income-producing real estate and is required to distribute a large portion of its income to unitholders. In India, REITs are listed on stock exchanges and regulated by SEBI. They were introduced in 2019, and the market currently includes a handful of listed REITs (Embassy Office Parks, Mindspace Business Parks, Brookfield India REIT, Nexus Select Trust) holding commercial office space, shopping malls and mixed-use properties.

REITs allow retail investors to own fractional interests in large-scale commercial real estate that would otherwise require hundreds of crores in capital. A single REIT unit priced at a few hundred rupees gives exposure to a portfolio of Grade A office buildings or premium retail malls across multiple cities. The investor earns income through regular distributions (similar to dividends) and potential capital appreciation as property values grow.

Why the payout requirement matters

Regulation requires REITs to distribute a large majority of their distributable cash flow to unit holders, which is what makes them attractive to income-focused investors. This structural requirement is also why REITs tend to behave more like an income-generating asset than a pure growth one, with returns coming substantially from distributions rather than only from price appreciation.

SEBI mandates that Indian REITs distribute at least 90% of their net distributable cash flow to unitholders, typically on a quarterly basis. This creates a relatively predictable income stream that appeals to investors seeking regular cash flow. The yield on Indian REITs has generally ranged from 5-8% per annum, depending on the specific REIT and market conditions. This is significantly higher than the dividend yield on most equity stocks and comparable to or better than fixed deposit rates, with the added potential for capital appreciation.

The distributions from REITs have a complex tax structure. Part of the distribution may be classified as interest income (taxed at slab rate), part as dividend (taxed at slab rate), and part as return of capital (not immediately taxed but reduces cost basis). The exact split varies by REIT and by period. Capital gains on sale of listed REIT units are taxed much like listed equity: short-term gains (units held 12 months or less) at 20%, and long-term gains at 12.5%. The holding period was aligned with listed equity in the July 2024 budget, though whether the annual long-term exemption available to equity applies to business-trust units has varied by year, so the applicable exemption is worth confirming for the specific financial year.

What still moves their price

REIT unit prices are sensitive to interest rates, since rising rates make their yield less attractive relative to safer alternatives, and to the health of the specific commercial property segments they hold, such as office occupancy trends. They are a genuine diversifier away from pure equity and debt, but they carry their own distinct set of risks worth understanding.