I will jot down why this might not be a good time to invest in real estate investment trusts or REITs in this post. And give you reasons I am buying them anyway. ReITs are real estate investment trusts. These are not precisely shares; these are sold in units. There are three listed ReITs in Indian markets. Brookfield ReIT, Mindspace ReIT, and Embassy Office Parks ReITs. These are all office space-based ReITs. I expect to see some rental house-based ReITs or some warehouse or database story house-based REITs. The USA has ReITs based on various real estate assets. But let us see what factors to consider to determine if are REITs a good buy now.
For all three options, the minimum number of units one needs to buy is 200. So, you cannot believe just one like any other common stock. As these ReITs collect rents, they will distribute the rental income to all unitholders. They can keep some income for maintenance or acquiring additional properties.
So, Is This A Good Time To Invest In ReITs? It could be risky to buy ReITs in India, considering that oil prices are going up along with inflation. If RBI starts increasing rate, ReITs will come down in price. Why? Because like banks, ReITs also take loans and build properties to earn rental income. If the cost of raw material goes up, in this case, it is cash, then the margins will come down, which will be one reason for the fall. On the other hand, the yield on the ReIts might increase, considering the rental income does not go down.
But yet, I am accumulating the ReITs now because the distribution yield is pretty decent and relatively predictable. At this point, I think the distribution yield is more predictable than the inflation and rate hike by RBI. And to be completely honest, I am buying in a staggered manner and not investing the whole capital at one shot. I see the possibility of those ReITs falling further, and I would like to accumulate more units when that happens. You can open brokerage free account with espresso and buy these ReITs today.
Are ReITs a Good Buy Now?
Update September 2021: I am waiting to Invest In REITs now; given the inflationary pressure everywhere, I think the interest rate going up may hurt these ReITs, and I might invest when the price comes down.
Here are few things to consider though, I prefer ReITs in India as an excellent alternative to commercial properties. It might be difficult for some retail investors to purchase and maintain commercial properties. ReIT investment comes with benefits of property ownership and minus the hassle. In fact, in India, rental yield is 2 – 3% on average. On ReIT you make more than that, pre-tax.
You should be mindful of the yield though, anything above 5 – 6 % is a good entry point. You have only 3 options so far – Embassy suites, Mindspace office Parks, and Brookfield real estate. ReITs have both properties of debt and equity. It is like a debt instrument because every quarter you can expect them to payout 90% of their income. Equity instrument property is the price escalation clause they have in their lease agreement with tenants, that ensures that the income keeps pace with inflation. You would want a better yield, so try to buy them at a lower price.
The unit price goes up as the interest rate comes down and overall when the market goes up, income investors invest in ReITs to generate regular income.
Why My Broker Rejecting ReIT Purchase Order?
I tried purchasing 1 or 10 ReITs, and I saw the order getting rejected. The reason is the minimum number of units you need to buy is 200. So you need to place an order for 200 units for any ReIT to make execute that.