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INVESTING IN REITS: Yields set to rise as interest rates peak

At a time when returns from fixed income products are rising, investors are not finding it attractive to invest in real estate investment trusts (REITs). In fact, yields of three listed REITs —Embassy Office Parks, Mindspace Business Parks and Brookfield India—are lower than benchmark bonds. However, REITs are expected to benefit from strong growth in commercial real estate rental as they are beneficial in the long run. Moreover, when the interest rates peak in a few months, the yields of REITs will rise and become attractive for retail investors.

Income generating assets

These trusts own income-generating commercial real estates in the country and one can buy units of these trusts. So, investing in REITs is an ideal way to diversify the portfolio apart from equities, debt and gold. They are suitable for those who want to put money in a real estate asset primarily for investment purposes and have a holding period of at least three years.

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An investor can start investing in REITs with Rs 10,000 to Rs 15,000 and buy the units from the stock market through a demat account. It is ideal for those who do not want to invest in a physical property. Also, an investor will not have to undertake a lot of documentation. Investors, especially high net-worth individuals, prefer REITs because they can be sold anytime in the secondary market.

Dividend yield

Investors must look at the dividend yields of the REITs they want to invest. That will indicate the performance of the portfolio in the trust. Moreover, analyse the revenue growth of the portfolio and the prospects of rental income of the commercial properties and occupancy percentage in the portfolio of the trust.

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As there are only three listed REITs at present, investors must track their results regularly to gauge the performance. The market regulator has advised the trusts to quarterly update on their overall activities. Dividends from REITs are tax-free and appreciation in the value of the units are taxable like equity shares. If an investor sells the units within a year, he has to pay 15% short term capital gains tax. If sold after one year, then 10% long term capital will be applicable on the gain amount above Rs 1 lakh.

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