How do REITs fit into your asset allocation portfolio?

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To build a healthy investment portfolio, finding the right balance between risk and reward is paramount. The first step in creating an investment strategy that is just right for you is balancing your portfolio to match your unique risk tolerance and desired investment objectives.

In India, we typically invest in a variety of asset classes that have come to be accepted as credible investment options including equities, fixed income instruments such as bonds, fixed deposits, as well as gold, mutual funds, public provident fund, and real estate. All these instruments offer varying potential for returns associated with varying degrees of risk.

For example, while real estate investments are traditionally known to appreciate in value over time, investing in real estate ­­– particularly commercial real estate – requires significant upfront capital, which places this asset class beyond the reach of most retail investors. However, the investment landscape is now changing thanks to the introduction of REITs or Real Estate Investment Trusts, professionally managed entities that own, operate, or finance income-generating real estate properties like workspaces and malls.

Since REITs took root in India five years ago (in 2019) the asset class has emerged as a potentially suitable component of long-term, diversified investment portfolios.

Why REITs may be good addition to your investment portfolio

Diversification of investments across asset classes and sectors is a crucial aspect of balancing portfolio risk and returns. Traditional retail investment portfolios have historically focused on a debt–equity split for diversification. With the availability of REITs, Indian investors can strive for generating regular, tax-friendly income potential in the form of dividend pay-outs along with the potential for risk-adjusted capital appreciation. This combination makes REITS a suitable portfolio allocation for income seekers and investors who seek to optimize their taxes while striving for wealth generation.

Historically, REITs have delivered competitive returns owing to their steady dividend pay-outs and long-term capital appreciation potential. Their relatively low correlation with other asset classes and the broader market makes them a suitable tool for portfolio diversification and can help investors strike the appropriate risk/return balance. This makes them an attractive diversification instrument across markets and economic cycles.

Why invest in REITs now?

Commercial real estate has for long remained inaccessible to retail investors due to high entry prices, the illiquid nature of investment, potentially complicated tax implications, and difficulties in administering and managing significant assets. Thanks to REITs, retail investors can now seek to build wealth through commercial real estate by investing small, affordable sums periodically and conveniently into a scheme of their choice. Moreover, investing in REITs comes with the added benefits of professional management, high liquidity, and tax efficiency.

Indian REITs typically boast of quality office and retail assets leased to leading companies and occupiers in the world. The investment product is backed by a strong regulatory framework at par with developed economies and offers a low entry barrier. What makes REITs especially attractive is the sharp revival they experienced post the pandemic transforming how this investment class is perceived by Indian investors.

Most investors seek stability in investments. By their very nature, REIT assets are relatively stable owing to the underlying long-term leases with MNCs and Fortune 500 companies. Apart from the potential for capital appreciation from the increase in value of the underlying properties, REITs offer the added advantage of quarterly dividend pay-outs which can be invaluable for investors who desire a regular income.

Highly governed and transparent

REITs are well suited for all demographics as they offer a suitable mix of wealth creation potential and income generation potential along with relative stability of the investment amount. Moreover, SEBI has laid down stringent regulations to safeguard investor interests and maximize the regulation of the investment instrument.

For example, regulatory norms mandate dividend distribution of a minimum 90% of distributable cash flows. Investor interests are further prioritized by mandating a minimum 80% of value to be invested in income-generating projects and properties. To that end, only companies with an asset base of INR 500 crore or more are allowed to set up REITs; hence investors can rest assured that only serious and dedicated players enter the market. SEBI has also enforced robust transparency standards and regulations backed by the requirement of detailed annual audits.

India's REITs market comprising prominent trusts including Brookfield India Real Estate Trust, Embassy Office Parks REIT, Mindspace Business Parks REIT, and Nexus Select Trust have collectively distributed more than INR 17,000 crore to over 2.3 lakh investors as of April, 2024.       The total Assets Under Management (AUM) stands at INR 1,40,000 crore and their vast portfolio encompasses over 115 million square feet across India’s top commercial and retail markets. The assets are spread across several major Indian cities and span various industries thus lowering geographical and sector specific risks.

Stability of REITs with liquidity of equity

REITs are traded on the stock exchange, offering you the flexibility to buy and sell units easily through your demat account. There are no lock-ins, no minimum initial investment restrictions, and you can start your REIT journey for as little as INR 100 per unit. Hence, REIT units are bought and sold like any other stock or ETFs.

Inflation protection

Owing to the fact that many leases are tied to inflation and that real estate values have tended to increase in response to rising replacement costs, REITs have provided a natural hedge against inflation, and the dividend income potential can deliver a reliable stream of income even during inflationary periods.

For those investors looking to diversify their exposure to asset classes other than traditional equity, debt and commodities, REITs offer the familiarity, reliability, and high growth potential of India's commercial real estate. This is an asset class that is as flexible as your mutual fund investment (if not more!).

For More information on REITs log onto https://www.cnbctv18.com/ms/ira-reit2024/

Moneycontrol journalists were not involved in the creation of the article.