REITs

A Real Estate Investment Trust lets you own commercial property in units, on an exchange, without buying a building. What makes it worth a chapter is that its obligations are set by regulation, so you are not relying on a manager's intentions.

What it must hold

Not less than eighty per cent. of value of the REIT assets shall be invested in completed and rent and/or income generating properties.

And the remainder is constrained too: not more than twenty per cent in anything else, with under-construction property allowed only inside that twenty and required to be held for not less than three years after completion.

This is the provision that distinguishes a REIT from a property developer's shares. A developer builds, which means construction risk, approval risk and sales risk. A REIT is required to be, in the main, a landlord of finished buildings that are already producing rent.

Separately, a REIT must hold any completed, rent-generating property "for a period of not less than three years from the date of purchase" — so it cannot trade buildings in and out, for the reason chapter 2 gave about transaction costs.

What it must pay you

Not less than ninety per cent. of net distributable cash flows of the REIT shall be distributed to the unit holders.

The same ninety per cent floor applies one level down, from the SPV that owns the building up to the REIT, and where a holdco sits in between, one hundred per cent of what it receives from underlying SPVs must pass through.

And on timing: distributions "shall be declared not less than once every six months in every financial year" and made within five working days from the record date.

This is the core of the product. An ordinary company decides what to pay out; a REIT is obliged. You are not hoping management shares the rent — the structure requires it, which is why a REIT's yield is a far more reliable feature than a company's dividend.

How much it may borrow

Leverage is capped, with a graduated control:

The aggregate consolidated borrowings and deferred payments of the REIT, holdco and/or the SPV(s), net of cash and cash equivalents shall never exceed forty nine per cent. of the value of the REIT assets.

And above a lower threshold, extra scrutiny applies: if borrowings exceed twenty five per cent of asset value, any further borrowing requires a credit rating from a registered agency and the approval of unit holders.

If a breach happens through market movements in asset prices, the manager must inform the trustee and bring it back within limits within six months.

Compare that with an individual buying property. A buyer putting 20% down is borrowing 80% — far beyond what a REIT is permitted, with no rating requirement, no approval, and no cure period. The regulated vehicle is substantially less leveraged than the typical household.

What you gain

Divisibility. You can own ₹10,000 of commercial property. Chapter 7 explains why this matters more than it sounds.

Liquidity. Units trade on an exchange and settle in days, against months to sell a building.

Diversification. One REIT holds many properties across tenants and often cities, so a single vacancy is a small matter rather than the whole of your income.

Professional management, with the rent collection, maintenance and leasing done for you.

Access to assets you could not buy. Grade-A office parks are not available in ₹50 lakh units.

Disclosure. Valuations, occupancy, tenant mix and debt are published on a schedule.

What you give up

Control. You do not choose the buildings, the tenants, or when to sell.

Management fees, which an owner-occupier does not pay.

The leverage. You cannot borrow at home loan rates to buy REIT units, and home loan rates are far below what you would pay to borrow against securities. Much of residential property's apparent return comes from cheap long-dated leverage that is simply unavailable for this.

Use. You cannot live in a REIT, and chapter 1's use value is a real benefit that units do not provide.

Working the problem

A ₹50 lakh shop against ₹50 lakh of a listed REIT.

What the REIT gains you: diversification across many properties instead of one; liquidity in days instead of months; no tenant-finding, no repairs, no litigation; a distribution obligation of ninety per cent rather than a tenant who may or may not pay; leverage capped at forty-nine per cent with disclosure; published valuations.

What you give up: control over the asset; the ability to use it yourself; management fees; and the possibility of adding value through your own effort — finding a better tenant, refurbishing, negotiating.

The single risk a REIT introduces that direct ownership does not: market price volatility.

A shop is valued when somebody values it, which is to say rarely. A REIT is repriced every second the market is open, and its unit price can fall sharply for reasons that have nothing to do with the buildings — a change in interest rates, a sell-off in listed markets generally, or a liquidity event elsewhere.

The buildings did not change; the quoted price did. Over a long holding period this is mostly noise. Over a short one, or if you must sell during a market dislocation, it is a real cost that the illiquid shop would not have imposed — because nobody would have been offering you a low price, and you would not have seen it.

And the honest counterpoint: the shop's price also moves. You simply do not observe it, and Risk-adjusted return in the Measuring your return subject explains why an asset that is rarely repriced shows low measured volatility without being safer. The REIT's volatility is visible, not additional.

What is genuinely additional is the behavioural consequence of that visibility: a price you can see and act on is a price you may act on badly, which the Behavioural finance subject documents at length. For an investor who would sell during a drawdown, the shop's opacity is an accidental protection — and that is an argument about the investor, not about the asset.

The point

A REIT must hold at least eighty per cent of its value in completed, rent-generating property, may not trade a completed property within three years of buying it, must distribute at least ninety per cent of its net distributable cash flows at least twice a year, and may not borrow beyond forty-nine per cent of asset value — with a credit rating and unit holder approval required above twenty-five. Those obligations are the product: you are not hoping a manager passes the rent through, you are relying on a rule. Against direct ownership you gain divisibility, liquidity, diversification and disclosure, and give up control, use and cheap leverage. The one genuinely new feature is that the price is visible, which is a behavioural risk rather than an economic one.