For most of us, real estate investing has traditionally meant buying a house, office or plot of land. But what if you could own a slice of premium commercial properties in Mumbai, Bengaluru or Hyderabad without paying crores of rupees upfront?
That's the proposition offered by Real Estate Investment Trusts (REITs), an investment vehicle that is increasingly finding a place in investor portfolios, and even mutual funds. Speaking on NDTV Profit's Your Money Matters, Knowledge Realty Trust CFO Neeraj Toshniwal broke down how REITs work, how they generate returns and what investors should know before considering them.
Here are five key questions that break down what REITs are.
What Exactly Is A REIT?
“REIT is like a mutual fund of real estate assets,” Toshniwal said. Instead of directly buying a property, investors purchase units of a listed trust through their demat account. The REIT pools investor money and owns commercial properties through special purpose vehicles (SPVs).
For instance, Knowledge Realty Trust owns office assets across Mumbai, Hyderabad and Bengaluru. Buying a REIT unit gives investors fractional ownership of that portfolio rather than a single property.
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How Do REIT Investors Make Money?
The primary source of income is rent. Commercial tenants pay rent to the properties owned by the REIT, and after deducting expenses, most of the income is distributed to investors.
“As per SEBI regulations, we are required to distribute 90%, but we are distributing 100% to unit holders,” Toshniwal said.
Current yields in the sector typically range between 5.5% and 6% annually, distributed quarterly. Investors may also benefit from capital appreciation if property values rise or rental income increases over time.
What Drives Future Returns?
Unlike residential property, commercial REITs often have built-in rental escalations. Toshniwal said a significant portion of leases include annual or periodic rent increases, helping boost cash flows over time.
Knowledge Realty Trust currently has about 92% occupancy across its portfolio, with demand supported by Global Capability Centres (GCCs), which continue to lease premium office space across India's major cities. “Last few quarters, the tailwind of GCCs has pushed the portfolio,” he said.
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What About Taxes?
This is where REITs become more complicated than traditional stocks. Payouts can consist of dividends, interest income and repayment of capital, with each component taxed differently.
According to Toshniwal, roughly 55%-60% of distributions in his REIT's case are currently tax-free dividends, around 20% is treated as repayment of capital, while the balance is taxed as interest at the investor's applicable tax slab. The exact composition varies from REIT to REIT and is disclosed to investors periodically.
Why Consider A REIT Instead Of Physical Property?
Instead of committing tens of lakhs, or even crores, to a single property, investors can gain exposure to commercial real estate through a listed instrument that can be bought and sold like a stock. There are no tenant-management hassles, no registration paperwork, and no large ticket-size requirements.
For simple diversification, REITs can offer an alternative way to participate in India's commercial real estate market. The trade-off is that investors need to understand the structure, risks and tax treatment before treating them as a simple substitute for property ownership.
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