8 Common Terminologies You Need to Know Before Investing in REITS

Indians traditionally like real estate as an investment. There’s an inherent belief that real estate investment will, more often than not, result in capital appreciation. That said, investing in real estate has generally demanded a large ticket size, particularly in metros and tier-I cities. This often acted as a deterrent for many who didn’t have a large investible surplus.

However, real estate investment trusts (REITs) have made it possible to invest in the sector even if you don’t have a large amount of money. So, what is a real estate investment trust and the terminologies you need to know before investing in them? Let’s explore.

What is an REIT?

Simply put, REITs are pooled investment vehicles like mutual funds, which invest in real estate. An REIT is a firm that owns, finances or operates income-producing real estate properties. By pooling capital from various investors, a REIT invests in large-scale properties like office buildings, apartments, malls, and hospitals, among others.

REITs, which are like shares listed on the stock exchange, allow you to start investing in real estate with a small amount. REITs in India were introduced in 2014 to democratise real estate investments in India.

Terms you should know before getting into REIT investing

Before REIT investing, you need to be aware of certain common terminologies that you are likely to encounter to better understand REITs. These include:

1. Funds from operations

Funds from operations measure the cash generated by a REIT from its operating activities. They help you gauge an REIT's actual profitability and represent its income. Funds from operations provide a better REIT's cash-generating ability as they eliminate non-cash charges and irregular gains and losses.

2. Equity REITs

Equity REITs are a type of REIT that invests in income-generating real estate properties. These could be commercial properties where revenue is generated through rentals and sales transactions. These are then distributed as dividends to shareholders.

3. Mortgage REITs

Mortgage REITs are another type of REIT. Also called mREITs, they lend funds to real estate companies. Earnings are primarily through interest income, which is then distributed among shareholders.

4. Hybrid REITs

Hybrid REITs give you the benefits of equity REITs and mREITs. They invest in physical properties and real estate debt instruments, you can diversify your investment across debt and equity through hybrid REITs.

5. Cash available for distribution

Cash available for distribution (CAD) shows an REIT's ability to generate cash and distribute dividends among shareholders. It is also called funds available for distribution. REITs with growing CAD are generally considered good, as they indicate strong operational efficiency.

6. Net asset value (NAV)

NAV represents a REIT’s assets minus its liabilities. Through NAV, you can understand whether an REIT is trading at a premium or discount.

7. Occupancy rate

Occupancy rate is the percentage of an REIT’s property, leased or rented. A high occupancy rate is generally considered a good sign as it indicates that the properties are generating income. However, you must also consider the quality of tenants and the stability of leases.

8. Leverage

Leverage is the amount of debt an REIT uses to finance its assets. Expressed as a percentage, leverage allows REITs to amplify their purchasing power.

How to Invest in REITs?

Open a Demat account for REIT investment in India. Once you have a Demat account, you can opt for the REIT you want to invest in. You can also invest in them via mutual funds, with a few domestic funds investing in them.

Wrapping it up

Prudent REIT investments can help you diversify your portfolio without making huge upfront investments and the need to buy properties. Professional asset management is another key benefit. However, like proceeding with any investment, make sure to carry out due diligence.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.