How to include REITs in your investment portfolio for stability

Real Estate Investment Trusts (REITs) are becoming an essential part of diversified investment strategies in today’s fast-changing financial landscape. As the property market evolves, REITs offer a way to benefit from real estate returns without the hassle of direct property ownership.

The appeal of REITs lies in the stability and growth of the Indian real estate sector. REITs have delivered competitive returns, with consistent rental yields and potential for capital appreciation. Collectively, these REITs distributed ₹4,259 crores in the first nine months of FY25, marking a 15% YoY growth from ₹3,706 crores in 9M FY24 (Source: Indian REITs Association Data). This makes them a compelling choice, positioned between traditional fixed-income investments and full equity exposure, offering portfolio balance to investors.

The Stability Advantage

REITs offer stability through professional property management and robust corporate governance.Strong corporate governance provides investors with a sense of security. With clear regulations and disclosure requirements set by SEBI, investors have access to financial and operating information. This regulatory oversight reduces risks and builds investor confidence.

Creating Your REIT Strategy

For those considering REITs in their investment portfolio, a structured approach is essential.

• Determine Allocation: Start by deciding how much of your portfolio should be in REITs. Low risk appetite investors may allocate 15-20% of their portfolio to REITs.
  
  
• Leverage Liquidity: Unlike traditional real estate, REIT units in India trade on stock exchanges – BSE and NSE, making it easy to buy and sell via demat accounts. This flexibility is useful in changing market conditions.

Understanding Taxation

The taxation structure of REITs offers significant benefits.

REIT distributions generally consist of four components – Dividend, Interest, Amortization of SPV debt and Other Income. Generally, dividend and other income are tax-free in the hands of unitholders, while interest income is taxed at applicable tax rates. Proceeds from amortization of SPV debt are not taxable at the time of distribution but are reduced from the cost of acquisition while computing capital gains at time of sale of REIT units. Capital gains from selling REIT units follow market tax regulations, providing a stable tax framework for investors.

Investment Approaches Based on Risk Profile

Investors can tailor their investment in different type of REITs based on their financial goals:

• Cautious REIT Investors: Should focus on REITs with stable tenants and long-term lease agreements, ensuring steady income and lower volatility.
• Moderate REIT Investors: May opt for a mix of REITs across different property types to enhance diversification. Allocating 10-15% of the portfolio can be a balanced approach.
  
  
• Growth-Oriented REIT Investors: Can target REITs with development potential and high-growth market exposure, possibly allocating up to 20% to maximise both income and capital appreciation.

Monitoring Your REIT Investment

To ensure REIT investments remain profitable, investors should:

• Track distribution yields post taxes compared to other income-generating assets.
• Keep an eye on market trends and interest rate movements that impact REIT performance.
• Diversify investments across property types and regions to reduce risks.
• Monitor leverage levels in REITs to assess financial stability.

Looking Ahead

Indian REITs have demonstrated strong returns, making them a valuable addition to modern investment portfolios. Their ability to provide regular income along with growth potential makes them a strategic choice for investors seeking stability.

For those looking to build resilient portfolios in today’s market, REITs offer a well-balanced mix of income, growth, and professional management. By carefully planning allocations and staying informed, investors can fully utilise the benefits of REIT investments to strengthen their financial future.

(The author Pratik Dantara is Head – Investor Relations & Strategy, Nexus Select Trust and Executive Committee Member, Indian REITs Association. Views are own)