Real estate exposure without buying a flat

Buying a flat eats a big chunk of savings, ties you to one location, and takes months to sell when you need the money. Lack of liquidity is the biggest drawback of owning property directly.

There is another way. Let professionals pool money from investors, buy real estate, and hand you a slice. You pay a fee for this. These routes are open to Indian investors: REIT and fractional real estate. They look alike but are different.

A REIT

A Real Estate Investment Trust (REIT) collects money from investors and buys rent-earning property viz. office parks, shopping malls and warehouses. You do not have to identify a property, negotiate with sellers, get a large loan, deal with tenants/manage the property. REIT takes care of these activities. Your money buys REIT units which are listed on stock exchanges. You buy and sell them like a share. People often call a REIT a real estate version of ETF. That is loose talk. An ETF tracks an index. A REIT is a manager’s choice of buildings and you live with what he picks. A closer comparison is a listed fund holding property instead of shares. In India, a REIT has to be set up as a trust. It normally holds its buildings via separate firms viz. special purpose vehicles. The idea is to keep the legal ownership and debt of one asset from spilling onto another.

Also read: Nuts and bolts of Real Estate Investment Trusts

Thin rental yield

Homes give a thin rental yield..too thin for a vehicle built around rent, so Indian REITs are mostly commercial. The rules push the same way. At least 80% of REIT’s assets must be completed and earning rent.. no half-built projects. The rule makes a REIT attractive. SEBI requires REIT to distribute at least 90% of net distributable cash flow. The same 90% applies at the SPV level, so rent travels up to you instead of sitting inside the structure.

Read the fine print on what you receive, though. The cheque is not one thing. It is a mix of interest, dividend, rent and sometimes repayment of loans, and each taxed differently. Check the split a REIT declares before you work out what you keep after tax. The return has two parts: payouts you collect and the gap between the price you paid and the price you sell. Rising building values do not reach you as income. They show up, if at all, in the unit price, and you cash in only when you sell. That price moves with the stock market and interest rates and can sit below what the buildings are worth. Since January, mutual funds treat REIT units as equity. However, it does not remove price swings.

You can start with one unit which gives a stake in top-grade offices and malls and sell on any trading day.

Fractional real estate

It works on a smaller canvas. A platform/realty firm finds a property, gathers investors and pools money. Each investor owns a share of the property, rent comes and you get a cut.

The trade-offs are plain. On the plus side, you know exactly what you own: the building, the tenant, the lease terms. A REIT gives you a portfolio. This gives you an address. On the minus side, it is one property, so one vacancy or one tenant default hits hard. And in the older, unlisted set-ups there is no exchange to sell on. To exit, you need another investor willing to take your share and that buyer may never turn up.

This space is no longer a free-for-all. In 2024, SEBI created a regulated version called the Small and Medium REIT, or SM REIT. It covers properties valued between ₹50 crore-₹500 crore, needs a minimum investment of ₹10 lakh and needs at least 95% assets to be earning rent. Units are listed, but with a ticket that large, expect thin trading.

Which one fits

The investor’s goal should be to build a diversified portfolio. For someone who wants real estate exposure without high capital need, REITs provide an alternative. For most investors, REIT is spread across many buildings, cheap to enter and can be sold when needed. An SM REIT suits one with a larger cheque wanting concentrated bet and can live with a slow exit. A REIT is as good as those managing it.

Bottom line

Why real estate at all? Real estate does not always move in step with others. Both structures are a play on rental yield with some capital gain on top. Currently, home rentals yield little but commercial property pays decent yields, and these vehicles are how you tap them. One warning. Rent is not guaranteed, tenants leave, leases end, and payouts can fall. Do not treat REIT as a bond with a fatter coupon. Size it as a part of your portfolio not the whole of it.

(Joydeep Sen is a corporate trainer (financial markets) and author)