How to Invest in Real Estate Investment Trusts (REITs) in India

Investing in Real Estate Investment Trusts (REITs) in India offers an opportunity to participate in the country’s growing real estate market without directly owning physical properties. These investment vehicles provide a structured way to gain exposure to income-generating real estate assets. Understanding the mechanics and regulatory framework surrounding Indian REITs is important for potential investors.

Understanding Indian REITs

Real Estate Investment Trusts in India function as collective investment vehicles, similar to mutual funds, that primarily own, operate, or finance income-generating real estate. These trusts are registered with the Securities and Exchange Board of India (SEBI) and are listed on stock exchanges, allowing for public trading of their units. Indian REITs typically invest in completed, revenue-generating commercial properties like office spaces, shopping malls, and warehouses.

REITs generate income primarily through rental revenues from their leased properties, along with potential capital appreciation of the underlying real estate. A significant portion of this income, at least 90% of their net distributable cash flows, must be distributed to unitholders semi-annually. The regulatory framework requires that at least 80% of a REIT’s assets be invested in completed, income-generating properties, with a maximum of 20% allowed for under-construction projects or other instruments.

Traditional REITs in India typically require a minimum asset value of INR 500 crore, while Small and Medium REITs (SM REITs) can have assets between INR 25 crore and INR 500 crore. This structure provides a transparent and professionally managed avenue for real estate investment.

Investment Avenues for Indian REITs

Individuals interested in Indian REITs have several pathways to consider for investment. The most direct method involves purchasing units of listed REITs on recognized stock exchanges. This approach provides direct ownership of REIT units and allows investors to trade them like regular stocks.

Beyond direct purchase, investors can also gain exposure through indirect avenues such as mutual funds or Exchange Traded Funds (ETFs). Some mutual funds focus specifically on the real estate sector, including investments in Indian REITs. These funds pool capital from numerous investors and are managed by professionals who select a diversified portfolio of real estate-related assets. Similarly, REIT-specific ETFs offer diversification by holding units of multiple REITs within a single fund.

Practical Steps for Direct Investment

Directly investing in Indian REITs from the United States involves several procedural steps. An investor must first obtain a Permanent Account Number (PAN) card from India, which is a unique identification number for tax purposes. Subsequently, opening a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank account in India is necessary for fund transactions.

After securing the PAN and bank accounts, the next step is to open a Demat and trading account with a SEBI-registered stockbroker in India. Many prominent brokerage firms operate in India, and their registration ensures adherence to regulatory standards and investor protection. This process typically involves completing Know Your Customer (KYC) requirements, which include submitting identification and address proofs, often through an online or physical application process guided by the chosen broker. The broker will provide the necessary forms and assist in filling out the required personal and financial details.

Once the accounts are established and linked, funds can be transferred from the investor’s NRE or NRO account to the trading account. After funding the account, investors can research and select specific Indian REITs based on their investment goals and risk tolerance. Placing buy orders for REIT units is similar to purchasing stocks, utilizing either market orders or limit orders through the broker’s trading platform.

Important Considerations for Indian REIT Investors

Before committing capital to Indian REITs, investors should consider several factors to make informed decisions. Conducting thorough due diligence on the specific REIT is important, examining the quality and location of its underlying assets, occupancy rates, and the terms of lease agreements. Evaluating the sponsor’s track record and the REIT’s geographical diversification can also provide insights into its stability and growth potential.

REITs generate returns through two primary components: regular distributions from rental income and potential capital appreciation of their units. Indian REITs typically offer annualized distribution yields, which are paid out periodically, often quarterly. Unit values can also appreciate over time as the underlying property values increase.

Liquidity is another consideration, as REIT units are traded on stock exchanges, providing more flexibility than direct property ownership. However, trading volumes and market depth can vary, potentially affecting the ease of buying or selling units. Understanding the tax implications of income received from Indian REITs is also important for non-resident investors. Rental income distributed by REITs is subject to a 5% withholding tax for non-residents. Dividend income can be taxed at 20% for non-residents, though this may be reduced based on applicable tax treaties.

Capital gains from the sale of REIT units are also subject to taxation. Short-term capital gains, for units held for less than one year, are generally taxed at 15%. Long-term capital gains, for units held for more than one year, are taxed at 10%, provided the gain exceeds INR 1 lakh. Consulting with a tax professional familiar with Indian tax laws for non-residents is advisable to understand specific liabilities and reporting requirements.