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What is a ‘Real Estate Investment Trust – REIT’

A Real Estate Investment Trust is a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. Real estate investment trusts provide investors with an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields.

UNDERSTANDING ‘Real Estate Investment Trust – REIT’

REITs, an investment vehicle for real estate that is comparable to a mutual fund, allowing both small and large investors to acquire ownership in real estate ventures, own and in some cases operate commercial properties such as apartment complexes, hospitals, office buildings, timber land, warehouses, hotels and shopping malls.

All REITs must have at least 100 shareholders, no five of whom can hold more than 50% of shares between them. At least 75% of a REIT’s assets must be invested in real estate, cash or U.S. Treasury’s; 75% of gross income must be derived from real estate.

REITs are required by law to maintain dividend payout ratios of at least 90%, making them a favorite for income-seeking investors. REITs can deduct these dividends and avoid most or all tax liabilities, though investors still pay income tax on the payouts they receive. Many REITs have dividend reinvestment plans (DRIPs​), allowing returns to compound over time.

REIT History in INDIA

REITs have existed for more than 50 years in the U.S. But in India REIT is a new phenomenon. The introduction of real estate investment trusts (REITs), will provide a platform that will allow all kinds of investors (even those with smaller budgets) to make safe and rewarding investments in the Indian property market.

The REIT platform has already been approved by the Securities and Exchange Board of India (SEBI) and like mutual funds, it will pool the money from all investors across the country. The money collected from the REIT funds, will subsequently be invested in commercial properties to generate income.

A REIT will need to be registered via an initial public offering (IPO). REIT units will have to be listed with exchanges and consequently, traded as securities.

The SEBI board has kept the minimum asset sizes to be invested in, at Rs 500 crores. However, the minimum issue size would have to be less than Rs 250 crores. As with stocks, the investors will be able to buy the units from either primary and/or the secondary markets.