Understanding REIT yields: What Indian investors need to know

While REITs are listed and traded like shares, they behave differently when it comes to returns.

Real estate investment trusts (REITs) have become an increasingly popular investment option for Indian investors seeking exposure to income-generating commercial properties without owning real estate directly. But one of the most important things to understand before investing is how REITs generate yields, the income or return you earn from holding them.

While REITs are listed and traded like shares, they behave differently when it comes to returns. Unlike regular stocks that primarily generate capital gains, REITs offer a mix of income and price movement, making them a unique hybrid between equity and fixed-income investments.

Let’s break down the three components of REIT returns, with a focus on yields.

1. Dividend yield: The core of REIT income

The primary yield component for REIT investors is dividend income. According to Securities and Exchange Board of India regulations, REITs must distribute at least 90 percent of their net distributable cash flows to unitholders. These cash flows are typically generated from rental income, maintenance fees and other sources linked to their leased commercial properties.

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This regular distribution is what replicates rental income of direct real estate investment, which makes REITs attractive to income-seeking investors. In India, most REITs follow a quarterly distribution cycle. On average, REITs in India have offered dividend yields in the range of 5 percent to 7 percent, depending on the underlying asset quality and occupancy levels.

Unlike dividends from equity shares, REIT distributions are not subject to dividend distribution tax (DDT). However, they are taxed in the hands of the investor, depending on the composition, interest, rental income or capital return that is disclosed by the REIT.

2. NAV-linked price appreciation: Capital growth potential

While dividend yield is a regular source of income, REIT investors should also be aware of NAV or net asset value appreciation, which reflects the growth in the value of the REIT’s underlying assets.

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REITs declare their NAVs periodically, which reflects the fair value of their property portfolio. If the properties they own increase in market value due to higher rental yields or improved market demand, the NAV will rise.

This increase can lead to a corresponding rise in the REIT’s market price over time, contributing to capital appreciation.

However, Indian REITs often trade at a discount to their NAV, meaning investors are sometimes able to purchase them below their fair asset value. While this may seem like a bargain, it also reflects market sentiment, liquidity and investor confidence. So while NAV growth adds to yield indirectly, it is more unpredictable than dividends.

3. Market-driven price fluctuations: The volatile element

The third aspect influencing REIT yields is price fluctuation in the market. Although the NAV indicates the fair value of properties, the real market price of REIT units is influenced by supply and demand, similar to stocks.

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This means a REIT can trade above or below its NAV, depending on investor confidence, quality of assets, interest rate expectations and general market trends. Events like large lease expiries, tenant defaults or sector-wide concerns can lead to short-term price dips. These fluctuations can erode or enhance yield, depending on the entry price and investment horizon.

Conclusion: Balancing yield with risk

To sum up, REIT yields come from dividends, NAV-based appreciation and market price changes. Together, they usually offer a total return of 8–10 percent annually, with dividend yield forming the stable core and capital appreciation or depreciation adding variability.

For investors seeking regular income and diversification, REITs can serve as a middle ground between equity and debt. But understanding what drives their yields and the risks involved is key to making informed investment decisions.

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The author is the head of investment strategy at 1 Finance.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.