Imagine owning a piece of the famed Empire State Building, a 102-storied art deco structure that defines the skyline of Manhattan in New York — one of the most recognisable cityscapes of the world!

Even as the property owner only rents the space out with a price tag of Rs 5,000-6,000 a square foot, it is possible to own a slice of the iconic building through an investment vehicle which is fairly well entrenched in the US and Western world.

The Empire State Building is just one example of many landmark properties which Real Estate Investment Trusts (REITs) own and manage around the world. These trusts are usually listed on the stock exchanges which allow wider participation from investors, including retail. And now, the option to invest in commercial real estate is also available to Indians.

There are four REITs listed on Indian bourses at present. While three of them have rent generating office spaces as their underlying asset, one holds retail spaces (malls) across India. The trusts issue units, akin to shares in a company structure, which are traded on the BSE and the NSE.

Consequently, it is now possible to own a piece of commercial real estate — be it office or shopping malls — by buying units for as low as Rs 112 a piece depending on the price of the units. Compare this to the hassle of buying, owning and renting out an office space. Retail investors usually look for real estate upside by putting money in a residential unit or land parcel.

Before we delve further, let us look at the basic structure of REIT.

REIT is set up by sponsors, akin to promoters in a company. For instance, private equity firm Blackstone is the sponsor of Nexus Select Trust, the latest REIT to be listed on Indian bourses.

The sponsor usually holds the majority of the units in a REIT, which is managed by an independent trustee (a professionally managed firm) which holds the assets for the unit holders. The day to day activities of the REIT (managing the assets) is done by independent managers for a fee.

The moot question

Should retail investors consider investing in REIT? Yes, says Samantak Das, chief economist and head of research & REIS at JLL. “Retail investors looking for a regular source of income, portfolio diversification and capital appreciation should consider investing in REITs. They provide diversification across asset classes and geographies, an opportunity to invest in real estate properties in smaller denominations through organised and formal platforms,” Das said.

What are the benefits?

Ritwik Bhattacharjee, chief investment officer of Embassy REIT, argues that one can look at REITs as a good dividend paying stock.

“REITs are mandated to pay out at least 90 per cent of net distributable cash flows (NDCF) to their unit holders. Consequently, investors get regular income through distribution. Moreover, they can expect capital appreciation as REITs have strong embedded growth potential through vacant space getting leased out and rental escalation.”

Sebi mandates that NDCF must be distributed twice a year. Some REITs do it every quarter.

An alternative to FD/ bonds?

Prashant Thakur, senior director and head of research at Anarock, warns that expectation from REIT should be moderated

“Small investors often raise a pertinent question — will REITs be able to offer the same returns that one expects from real estate investments? The answer to this is simple. No, an investor with expectations of unrealistic returns (above 20-30 per cent) will not be able to get it,” he said.

Thakur argued the return on investment (RoI) from REITs will be more structured, realistic and risk-averse because it is more for investors who want a steady income with minimum risks.

“One should be realistic in expecting the returns from REITs, which could hover around 7-8 per cent annually, post adjustment of the fund management fee. Moreover, REITs will be a good investment option for those investors who are looking to diversify their portfolio beyond gold and equity markets,” Thakur said.

Is REIT as risk free as FD?

The answer to this question is unequivocally no. It must be remembered that a REIT is a market-linked product and the returns are not guaranteed as in fixed deposit.

Das explains: “REITs can be considered moderate-risk investments with returns higher than a debt fund with the added benefit of capital appreciation such as equity stocks. REIT investments are subject to some of the risks of the real estate sector such as occupancy, rentals and asset management. REITs are also affected by changes in interest rate movements.”

However, it should also be borne in mind that real returns from FD/bonds are also subject to interest rate cycles.

Are REITs tax friendly?

In part, yes. However, the provisions were amended in the Union budget to neutralise tax advantages which REITs used to enjoy.

Punit Shah, partner of Dhruva Advisors LLP, explains: There is a component called ‘repayment of debt’ in the pay out which REITs make biannually.

Several REITs had taken a view that this component is not taxable in the absence of the express taxing provision.

The Union Budget 2023 proposed that repayment of debt will be considered as ‘income from other sources’. Multiple representations were made against the said amendment.

When the Finance Bill was passed, the proposal was amended to say that any distribution of repayment of loan over and above the cost of acquisition will be taken as income from other sources.

Assume you acquired a REIT unit for Rs 100. And there is an annual payout of Rs 20 per unit, including Rs 10 shown as repayment of debt.

If you hold the unit for 10 years and you earn Rs 100 as repayment of debt in that period, the component will be taxable from 11th year onwards.

More on the anvil?

Real estate experts believe that REIT is gaining ground in India. Listed REITs only hold 11 per cent share of the Grade A office space, leaving vast opportunity ahead.

Moreover, REIT is expected in warehouse, hospitality, data centre, healthcare and education as well.

Tax query

I am a resident individual having income from salary and dividend. I made a switchover from UTI ULIP to UTI Mastershare in March 2023. AIS shows redemption of ULIP and purchase of Mastershare. Which ITR to fill this year? Will I get the benefit of exemption of income up to Rs 1 lakh for the redemption after indexation?

Partha Sarathi De, Salt Lake

More than 50 per cent of the asset allocation in UTI ULIP is in debt instruments. You have not mentioned the period of holding. If the units are held for more than 36 months, there would be long term capital gains and the tax rate would be 20 per cent. If the units are held for less than 36 months, there would be short term capital gains and the tax rate would be according to your income tax slab rate. You may have to file ITR2 and disclose capital gains under schedule CG. The exemption of Rs 1 lakh is only available on long term gains from equity or equity-oriented hybrid funds or unlisted equity funds.

Different figures

My bank has reported to IT department two different figures — one under TDS 194A and the other under SFT-016 of AIS for the same set of deposits. The difference is not small. While both the figures appear in AIS, the larger amount is selected. What should I do in this situation?

S.K. Bose, email

Under section 285BA of the IT Act, specified entities are required to furnish a statement of financial transactions to the IT authority in certain cases. For instance, a bank is supposed to report to the tax authority the transactions if one or more time deposits of a person is aggregating to Rs 10 lakh or more in a financial year. Under notification no. 2 of 2021 of CBDT dated April 20, 2021, the reporting entity is advised to provide the information of interest income to the account holder in the form of interest certificate which will enable the taxpayers to reconcile the information in AIS. If your bank has not given it, you should seek one and consider that while filing returns.