REIT vs Physical Real Estate: Which one is a better investment option for you?

REITs (Real Estate Investment Trusts) are modeled after mutual funds. They collect or rather pool investments from retail and institutional investors and use them to hold and operate income-generating commercial assets. REITs are required to distribute 90% of the taxable income to their investors, either in the form of dividends or interest, or both. REITs are mandated by SEBI to invest 80% of their fund into income-generating assets.

In the past, higher ticket sizes have stymied investments from smaller retail investors into commercial assets. Meanwhile, REITs can systematically dismantle the disparity and enable smaller investors to get exposure to income-generating commercial asset classes such as Grade-A office spaces, retail properties, etc. There are presently three listed REITs in India and a few are in the pipeline.

REITs vs Real Estate: Risk Assessment

REITs are emerging as an alternate investment platform for real estate. They are gaining popularity and are touted as a step towards democratizing commercial real estate investment. However, believing that one day they will replace actual real estate might be far-fetched.

No matter, how much some real estate & financial market pundits claim REITs to be risk-averse, the ground realities are contradictory. REITs contain a definite amount of market as well as operational risks. There is an inherent risk of late operationalization of REIT assets due to legal hurdles. Similarly, there is a possible risk of slow offtake or low occupancy that can soften the potential returns.

Also, one has to factor in the pandemic, before evaluating the future of REITs, which mostly invest in commercial assets. In the wake of the Covid-triggered crisis, most of the large enterprises are operating from home, which may affect occupancy in near future.

Elevated Yields in Commercial Realty Investment

REITs generally give returns in the range of 5-6% and are a seemingly better alternative to invest than residential properties. In India, rental yields…

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