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Real estate has long been considered a fundamental staple of wealth building. For many, the idea of earning significant returns on wealth is almost a precept. However, the truth of earning significant wealth through real estate is much more nuanced than that. Enter the world of REITs, or Real Estate Investment Trusts, and, of course, the fascinating emerging phenomenon of SM REITs in the real estate sector.
The Real Estate Wealth Paradox
Riches in real estate are often spoken about in the context of an asset appreciating in value over time. Yes, real estate does appreciate and increase in value, but there is much more to that story:
- Inheritances and Fortuitous Investments: Many rich people acquire large portfolios through inheritance or a head start by investing early in burgeoning areas. These are often cases of huge luck and timing.
- Successful Commercial Deals: Some earn through high-value commercial real estate deals. Such deals are, however, very demanding in terms of industry know-how and huge capital.
- Business Investments: Businessmen acquire business profits for investment in real estate. Such a strategy is more about wealth preservation than creation. Indeed, real estate can preserve wealth very well. It tends to appreciate over time and positively acts as a hedge against inflation. It also provides rental income, offers significant tax benefits, and can be part of an inter-generational wealth transfer. Still, real estate alone might not be the best asset class purely from a returns perspective compared to stocks, which historically offer higher returns over the long term.
The Role of REITs
In step comes REITs. REITs will provide another avenue to investing in real estate rather than the complexities and the huge capital requirement of holding direct ownership of any property. Here is how it works:
- Design and Operations: A REIT is an entity that pools funds from investors to invest in a diverse portfolio of real estate assets. These assets are designed to generate rental income, which is passed on to shareholders as dividends.
- Income and Returns: Under law, REITs are compelled to distribute no less than 90% of their taxable income to the shareholders. This makes REITs very attractive to income-seeking investors. The yield on a REIT can be calculated as:
REIT Yield (%) = REIT Annual Dividend Per Share/REIT Share Price*100
This form of investment yields reasonably predictable but usually little capital appreciation.
- Types of Properties: REITs acquire different types of properties, such as residential, commercial, industrial, and healthcare property real estate. They are traded in the stock exchanges, making their price relatively liquid and less volatile than those of direct real estate investments.
Emerging Markets SM REITs: A New Development
The SEBI has amended the REIT Regulations 2014 to allow the formation of SM REITs. In simple language, this could mean democratizing real estate investment through fractional ownership and increased access.
Why SM REITs Are Gaining Attention
- Fractional Ownership: SM REITs provided the small investor with the potential for a stake in the real estate market long before it became dominated by big institutional players or high-net-worth individuals. This kind of fractional ownership reduces the barrier of entry much further, allowing many more investors to participate in real estate investments.
- Regulation and Transparency: Introducing regulations creates room for regulation and standardization while at the same time assuaging fears of transparency and fraud over investments in fractions. Investors can now invest with more confidence, knowing that their money is being managed by regulated entities.
- Diverse Investment Opportunities: SM REITs will invest in commercial as well as residential properties, providing wide investment diversification. This may help mitigate risks and offer investors stable returns.
- Integration of Proptech: Online fractional investment proptech(property technology) platforms complement the growth of SM REITs as they raise funds from a broad base of investors to acquire stakes in pre-leased commercial real estate. This sector will be further formalized and provide more structured and transparent investment products in the future under the new regulation.
Future of SM REITs
SM REITs have some trends working well for them:
- Urbanization and Economic Growth: Given the position that India occupies among the rapidly urbanizing emerging markets, there is a certain growth potential in demand for real estate in India. This, combined with diversity in property types and locations, would support the opportunity for SM REITs.
- Access to Investment: SM REITs reduce the minimum investment threshold and increase access to quality real estate assets for more retail investors who would otherwise have limited access to those assets.
- Regulatory Support :The regulatory framework that supports SM REITs gives more confidence to investors with a structured environment for growth. It is very vital for the development and success of this new asset class.
Conclusion
SM REITs are an evolutionary step in the landscape of real estate investment. It offers a distinct combination of accessibility, diversification, and regulatory oversight that appeals to investors generally. Unlike traditional real estate, which offers a way to preserve wealth, SM REIT offers a viable avenue for wealth accumulation and investment diversification.
SM REITs are an attractive opportunity to capitalize on growth in the real estate market while limiting its associated risk and capital requirements for investors. Perhaps as they pick up steam, they could be the next “big thing” in real estate, democratizing access to real estate investments and opening new avenues for financial growth.
In India, Assetmonk stands out as a premier alternative investment platform that offers a wide range of attractive opportunities to savvy investors. These opportunities include the commercial real estate structured debt space and carefully selected alternative investment opportunities.
