Invest Rs. 2 lakh, earn huge profits from Reality Markets

30-04-2017 Sun 13:38

There is no scope of buying land for Rs. 2 lakh, in present times, unless you go to a village, further away from the city. Many dream of investing in a good reality market, which is progressive. However, not everyone has the capacity to invest huge sums. But there is a possibility of investing just Rs. 2 lakh in reality market. Real Estate Investment Trust (REIT) creates that opportunity. What are REITs? How do they function? Let us learn the details:

Supposing you have Rs. 10 lakh. You can buy a 100 yards plot in your city or near it. You will become the owner of the land. REIT helps you to invest in such projects. Before buying a plot of land, many things like: which area would be more profitable in the future, where are plots available for cheap, are the plot or house documents authentic, etc., have to be thought of. You will have to pay registration fees. REIT will take care of all these.

For instance, Reliance Industries is a company owned by Mukesh Ambani. This company is listed in Stock Exchanges. Crores of investors are partners in this company along with Mukesh Ambani. Investors with even one share worth Rs. 1,200 are also shareholders. Stocks are giving the opportunity to invest in this vast company that has retail chain stores to Oil extraction rigs, by taking just one share for Rs. 1,200.

Similarly, REIT is meant for those who do not know how to invest directly in stock market. Mutual Funds do the same. Your money is invested in stocks, through mutual funds. The organisers take their share towards charges and expenditure and distribute the profits among investors. REIT also works in a similar fashion. It invests in the profitable reality markets and later distributes the profits to the shareholders.

For example, if an REIT collects Rs. 500 crore from investors, it will be listed in the stock market. Each investor will pay a minimum of Rs. 2 lakh towards Initial Payment Offering (IPO). Trading begins through REIT, in the form of units, like in mutual funds. Each investor can purchase any number of units. This way, the funds collected from the people will be invested in reality projects. The profits gained through these is distributed to the investors, in the form of dividends. Security and Exchange Board of India (SEBI) has ruled that at least 90 per cent of the profits have to be distributed to the investors.

buy or sell easily
As these are listed in stock market, it will be possible to buy or sell them at any time like normal shares. It is not possible to buy or sell away land or house at any time, under normal circumstances. After putting up property for sale, we have to wait for a good rate. A lot of time is taken for agreements, registrations and the like. But in REIT selling is possible at any time. The money is at hand within two days.

Only profitable projects
representational imageREIT organisations will have invest the money of the investors only in profitable projects. At least 90 per cent of the funds should be invested in projects where construction is completed and are ready for sale, commercial projects that would earn lease, Shopping centres, residential complexes and offices. Only 10 per cent of the funds should be invested in projects that would yield profits in the future. Investments can also be made in companies that are involved in real estate activity. At least 90 per cent of the revenue earned from rents and profits earned by selling real estate properties will be distributed as dividends.

Who is in-charge of REIT?
REIT works under the supervision of an independent legal advisor. His duties are described in the REIT Trust documents. He has to abide by the laws and protect the rights and profits of the shareholders. During IPOs, those who want to invest in REIT have to keep Rs. 2 lakh ready at hand. In stock exchanges, minimum lot is Rs. 1 lakh. By revamping the value of REIT once in a year, the Net Asset Value (NAV) is announced. REITs have to invest in a minimum of two projects. No more than 60 per cent of the funds should be invested in one project.

Where it started
representational imageREIT first began in America. These were brought in to create opportunity for investors, to invest in beneficial reality projects. It earned a lot of appreciation. Later, these were started in Singapore, Australia and Hong Kong. SEBI took steps to introduce this even in India. It issued guidelines regarding REIT in 2014. However, due to strict rules and regulations, no agency has come forward. SEBI has recently liberalised the rules. With this, some organisations have registered with SEBI to attract investors. Central government has exempted REIT shareholders from paying Income Tax (IT) on dividends. SEBI is allowing the organisations to collect up to Rs. 250 crore through IPO. According to consultancy firm, Kushman and Weikfeild, the Indian real estate market is giving Rs. 3 lakh crore opportunity to REITs.

Kinds of REITs
Internationally there are three kinds of REITs. Equity, Mortgage, Hybrid. Equity REITs primarily invest in properties and keep buying them. Revenue is earned through renting out these properties. Mortgage REITs give loans to real estate developers. It's main source of income is the interests on loans. Hybrid REITs invest in Equity as well as Mortgage REITs.

Profits and loss
representational imageExperts said that there is an opportunity to earn more dividends from REITs than from other investments. Revenues through rents from commercial complexes and offices is more and long term, compared to that of residential complexes. Not only higher dividends are earned, but the value of the invested properties appreciates overtime, leading to increase in investment value. But according to Hemal Mehta, senior director of Deloitte India, rental value is nearly 10 per cent and out of this, when expenditure is removed, only eight per cent profits remain.

Commercial real estate means buying a shopping complex or an office, which is not within the reach of an ordinary man. Even if you want to buy a commercial complex, you will have to shell down crores of rupees. But through REIT this can be done with just Rs. 2 lakh investment. Huge investments are necessary for reality markets. Moreover, investors have to get a minimum dividend. That is why they have to invest a minimum of Rs. 2 lakh. Tax on short term investment is 15 per cent. Risk factor is also existing. If for any reason reality markets fall, it will take several years before investors gain anything through their investments.

Real Estate Mutual Funds
Several mutual funds offer reality funds. The difference between these and REITs is that the mutual funds concentrate only in growing of investments. REITS focus on more profits. As such, they distribute more dividends to the investors. Reality funds invest in projects that are in progress. These gain profits only after completion and sale. Which means minimum profit is guaranteed. However, investments in these should be made for a minimum of five years. It is not easy to sell midway. In REITs, minimum investment is just Rs. 2 lakh. Usually, those who wish to invest in lands but do not have the budget, are showing interest in REITs. As such, liquidity is possible for investors. They can get money whenever they want.

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