In India, investing in real estate investment trusts (REITs) has blossomed as a method for people to invest in the ever-growing Indian real estate market, which is well-structured and efficient. REITs are investment tools that enable individual investments in estate properties without actually owning a physical piece of real estate. For NRIs, REITs are a better alternative to direct real estate investment as they are more accessible and less complicated.
This blog post serves as a comprehensive resource for NRIs, noting the need to understand the nuances of how REITs function.
What are REITs?
Real Estate Investment Trust (REIT) is a type of investment fund required by law to own, manage and acquire commercial real estate in income-producing properties. REITs operate like mutual funds, where funds are raised from different investors, and a wide range of commercial properties such as, offices, shopping malls, hotels, and warehouses within different investment portfolios, are purchased and managed.
Investors in REITs Earn Returns in Two Primary Ways:
- Dividend Income – REITs are mandated to distribute at least 90% of their profits as dividends, ensuring regular income for investors.
- Capital Appreciation – The value of REIT units may increase over time as the underlying real estate assets appreciate.
Types of REITs
There are three main types of REITs, each catering to different investment preferences:
1. Equity REITs
- The most common type of REIT.
- Own and manage income-generating real estate, such as office buildings, shopping malls, and hotels.
- Revenue is derived mainly from rental income rather than property sales.
2. Mortgage REITs (mREITs)
- Primarily provide financing for real estate projects rather than owning physical properties.
- Earn income through interest payments on mortgages and loans.
- More sensitive to interest rate changes and market fluctuations.
3. Hybrid REITs
- A combination of both equity and mortgage REITs.
- Diversified income sources from rental yields and interest earnings.
- Balanced risk exposure between property ownership and financing.
Key Players in the Indian REIT Market
The Indian REIT market has seen significant growth, with several major players establishing themselves:
- Embassy Office Parks REIT – India’s first publicly listed REIT, focused on Grade A office spaces.
- Mindspace Business Parks REIT – Owns a portfolio of commercial office parks across major cities.
- Brookfield India REIT – Specialises in premium commercial properties across India.
- Nexus Select REIT – India’s first retail REIT focused on shopping malls.
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Benefits of Investing in REITs for NRIs
REITs have become an attractive investment option for NRIs due to their unique advantages over traditional real estate investments. They provide regular income, lower risk, and greater flexibility, making them an appealing alternative to buying physical properties.
Passive Income Through Dividends
One of the biggest advantages of investing in REITs is the regular dividend income they generate. Since REITs must distribute at least 90% of their net income to shareholders, investors receive a steady stream of earnings, making them an attractive passive income option for NRIs.
Unlike direct property investments, where rental income may be inconsistent due to vacancies or maintenance issues, REITs ensure stable cash flows with professional management.
Diversification and Lower Risk Compared to Direct Real Estate Investments
Investing in REITs allows NRIs to diversify their real estate holdings across multiple properties, cities, and sectors, reducing the risk associated with owning a single property.
Additionally, REITs are professionally managed, mitigating risks related to tenant defaults, property maintenance, and lease management. Unlike direct real estate investments, where investors bear 100% of the asset risk, REITs spread the risk across a broader portfolio.
Liquidity and Ease of Trading on Stock Exchanges
Unlike traditional real estate, which is highly illiquid, REITs offer greater flexibility as they are listed on stock exchanges. NRIs can buy and sell REIT units just like stocks, ensuring quick access to capital without the long sales cycles associated with property transactions.
This high liquidity makes REITs particularly attractive for NRIs, who may need to repatriate funds or adjust their investment portfolios based on market conditions.
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How NRIs Can Invest in REITs in India
NRIs looking to invest in REITs need to be aware of the legal framework, investment process, and tax implications. The process is simple, but understanding the regulations ensures a smooth and compliant investment experience.
Legal and Regulatory Framework for NRI Investments in REITs
- NRIs are eligible to invest in Indian REITs under the Foreign Exchange Management Act (FEMA).
- Investments must be made through NRE (Non-Resident External) or NRO (Non-Resident Ordinary) bank accounts.
- REITs are regulated by SEBI (Securities and Exchange Board of India) to ensure transparency and investor protection.
Steps to Buy and Trade REITs in India
- Open a Demat & Trading Account – Required to trade REIT units on the NSE or BSE.
- Fund the Investment – NRIs must use NRE/NRO accounts for transactions.
- Select a REIT – Analyse REITs based on yield, asset portfolio, and historical performance.
- Buy REIT Units – Purchase REIT units via online trading platforms or brokers.
Tax Implications for NRIs Investing in REITs
- Dividend Income – Subject to 5% tax under India’s tax treaties with several countries.
- Capital Gains Tax –
- Short-term (less than 3 years) – 15% tax.
- Long-term (3+ years) – 10% tax on gains exceeding ₹1 lakh.
- Double Taxation Avoidance Agreement (DTAA) benefits may be available to NRIs depending on their country of residence.
Risks and Challenges of Investing in REITs
While REITs provide numerous benefits, they are not without risks. NRIs should be aware of market fluctuations, operational costs, and regulatory considerations before investing.
Market Volatility and Economic Downturns
Since REITs are traded on stock exchanges, their prices fluctuate based on market conditions and economic cycles. This volatility can impact short-term returns, unlike direct real estate, which may be less affected by market trends.
Management Fees and Operational Risks
The management fees charged by REITs can vary, but they typically range from 0.5% to 2.5% of assets under management (AUM) annually. Additionally, investors do not have direct control over property decisions, making them dependent on REIT managers for strategy execution.
Limited Control Over Property Management
Unlike direct real estate investments, where owners can personally oversee rental agreements and maintenance, REIT investors have no direct influence over property operations, leasing decisions, or tenant selection.
Comparing REITs with Direct Real Estate Investments
For NRIs looking to invest in Indian real estate, choosing between REITs and direct property ownership depends on investment goals, risk tolerance, and liquidity preferences. Each option has its own set of advantages and challenges, making them suitable for different types of investors.
| Factor | REITs | Direct Real Estate |
| Management Fees & Control | REITs charge management fees, reducing net profits. Investors rely on REIT managers for decisions. | Investors have full control over property decisions but must handle maintenance and tenant issues. |
| ROI Comparison | Generates regular dividend income and potential capital appreciation with low risk and diversification. | Returns depend on rental yields and property appreciation, which require market research. |
| Liquidity & Exit Strategy | High liquidity—REIT units can be bought/sold on stock exchanges for quick access to funds. | Low liquidity—selling property involves legal procedures, brokerage fees, and long timelines. |
Conclusion
REITs offer NRIs a structured, regulated, and low-risk alternative to traditional real estate investments in India. With high liquidity, steady dividends, and diversification, they present an attractive option for global investors looking to benefit from India’s booming property market.
For those who prefer direct property investments, Rustomjee offers luxury real estate options tailored for NRIs. Interested in investing in Indian real estate? Explore Rustomjee’s property offerings today.
FAQs
- Why should NRIs invest in REITs instead of physical real estate?
REITs provide liquidity, diversification, and professional management, eliminating the hassles of direct property ownership, such as maintenance, tenant management, and legal procedures. They also offer regular dividend income and are easier to trade on stock exchanges.
- Are REITs a safe investment for NRIs?
While REITs are regulated by SEBI and provide diversification, they are subject to market fluctuations. However, their structured and professionally managed nature makes them a lower-risk alternative to direct real estate investments.
- Can NRIs repatriate their REIT investment earnings?
Yes, NRIs can repatriate dividends and capital gains from REITs if the investment was made through an NRE account. Investments from an NRO account may be subject to repatriation limits.
