Investment Planning: Advantage REITs

 

Investment Planning: Advantage REITs

REITs stand for real estate investment trusts, and REIT units are useful financial products for investment planning purposes. To understand their utility in investment planning, we start with ignoring the part of real estate and we look at them solely as financial products. We analyze the products in comparison to the most widely-used financial products and then extrapolate their usage for financial and investment planning.

The two major categories of investment, traditionally, are debt investment and equity investment. Debt investment aims at generating regular returns during the investment period whereas equity investment largely aims at capital appreciation. Debt investors want steady income, safety of investment and avoid risks of equity markets. Although they get regular and steady income stream with debt investments, they are always in danger of losing out on capital appreciation because long time-frames have exponential cyclical upswings in assets such as stocks, metal and properties. This is when their fixed income generating capital suddenly starts looking meaningless. Capital appreciation in case of equity investing saves an investor from this eventuality, but it does not generate the much-needed regular returns.

The next question that arises is whether a combination of debt and equity can help achieve the twin objectives of regular returns and appreciation. Any quantum of money invested in any asset is governed by the psychological impact on an investor influencing his investment decisions. This in-turn decides how an investor can reap the benefits of investing. Only when the twin objectives of an investment are met viz. regular returns as well as capital appreciation, can investors gain from their investments to the fullest. Investors can seldom manage these counter-acting forces in actual practice, by way of a disciplined and focused approach to a debt-equity combination investing. Very often an investor is unable to stay invested and withstand the market gyrations. Regular returns from any investment keeps an investor’s morale high and the investor can comfortably remain invested, thereby fetching maximum capital appreciation.

REITs are that sweet spot between debt and equity which can serve many purposes for nearly all investors. With any investment, investors ideally wish for capital appreciation and regular payments. REITs being unique hybrid investment instruments, can generate returns in the form of dividends, interest and rentals. They have the potential to generate high yields combined with stability while investors simultaneously have a chance to gain from their capital appreciate in future.

Coming back to the part of real estate, inherent in the ‘REIT’ name itself (and the fact that the underlying assets for REITs are real estate) this places REITs in a unique category of investment. Quite like physical real estate in terms of the ownership experience, REITs invest in properties that generate high regular rental return. Additionally, REITs’ appreciation from underlying property (as of nearly all investment assets) happens over long time-frames to accommodate changes in the purchasing power of money. Evidently, asset appreciation may not happen gradually or consistently but investors do witness periods of uneven spurts in the asset prices. The high regular returns from REITs enable investors stay invested in REITs, thereby gaining maximum from capital appreciation, which emanates from the prices of REITs instruments being traded in stock exchanges. Herein lies the power of REIT investing, which make them an excellent financial planning product. And the good news for the Indian retail investor is that REITs are now available and being traded in our stock exchanges, just like other regular equity products.

-Written by: Gaurav Jain

 

(Mr. Gaurav Jain is a trainer and author of the books:

REITs and InvITs: What’s new in the Indian stock markets and  

Real Estate Investment & Financial Analysis: The Four Essentials of Building Wealth with Realty ; Views expressed are personal)