Real estate and Real Estate Investment Trusts are perhaps the two most prominent options in India. These vary in their nature, benefits, and risks. Therefore, we will compare the two types of investments concerning capital appreciation, rental yields, liquidity, and taxation.
What is a real estate investment?
Real estate investment means the direct buying of real property, which would mostly be residential or commercial. Returns come in the following forms:
- Capital Appreciation: Increase in the value of property over time.
- Rental Income: Gross monthly income arising from renters.
Returns from direct real estate
Interest in direct real estate investment in India has increased significantly since 2021, driven largely by the strong landscape of IPOs within the sector. IPO activity from housing finance companies has represented about 46% of all IPOs in the real estate sector, REITs about 22%, and real estate developers about 17%. Increasing primary market activity reflects an increasing sense of investor optimism over potential returns from the real estate space.
Direct real estate investment return shows a positive trend because of a few key drivers, such as increased infrastructure spending, India’s demographic advantage, and rising consumer spending. Better connectivity and amenities created by the government’s focus on infrastructure enhance property values over time.
Moreover, with a young and growing population continuing to demand housing and commercial spaces, the allure of real estate will be maintained. It is poised to offer promising returns, particularly in growth centres in the cities, given that regulatory support gives it a stable framework.
This environment has promoted more investors to invest in direct property purchases, and the expectation is long-term gains from appreciation and rental income. Real estate, after all, is an asset, and it, therefore, offers a hedge against inflation, which presents a unique appeal compared to most other investment options. The returns from direct real estate investments are likely to stay strong for now, full steam ahead into India’s economic growth and urbanisation trends.
Pros and cons of direct real estate investment
Pros:
- Tangible asset ownership.
- Potential for significant capital appreciation in high-demand areas.
- Tax benefits associated with home loans.
Cons:
- High initial investment and transaction costs.
- Illiquidity: selling a property can take time.
- Ongoing maintenance responsibilities and potential tenant issues.
What are REITs?
A REIT is a company that possesses or finances income-generating real estate across several property sectors. As an investor, you build a portfolio by acquiring shares in the marketplace and providing returns from earnings and capital appreciation.
Returns from REITs
From October 31, 2024, the three listed real estate investment trusts (REITs) at SEBI have seen mixed results; hence, the findings of investments in India’s real estate sector have not been so similar.
The yield of REITs in India’s real estate market is presented as an attractive vehicle through which investors can find access to real estate without directly buying properties.
Another attractive feature of this REIT is the liquidity and predictable revenue stream. Performance varies with the underlying assets and market conditions. Therefore, it becomes very important to analyse the composition of the underlying asset in each REIT against its return track record for a rational investment decision.
Pros and cons of investing in REITs
Pros:
- Liquidity: Shares can be easily sold on stock exchanges for easy access to cash compared to physical properties.
- Diversification: REIT investments offer a diversified portfolio of properties without requiring an enormous amount of capital.
- Professional management: REIT management is conducted by professionals who handle property management and related operational tasks.
Cons:
- Market volatility: Prices of REITs are decided based upon the volatility of the market.
- Taxes on dividends: With regard to taxation, income from dividends is exempted for some conditions but open to withholding taxes once the tax brackets criteria are met by the investor.
Comparative Analysis
| Feature | Direct Real Estate | REITs |
| Initial Investment | High (typically several lakhs) | Low (can start from ₹300) |
| Liquidity | Low (time-consuming to sell) | High (traded on stock exchanges) |
| Capital Appreciation | Moderate (5% annually) | Higher potential (12% including dividends) |
| Management Responsibility | High (property management required) | Low (professionally managed) |
| Tax Efficiency | Tax benefits on home loans | Dividends may be taxed |
Conclusion
In general, the difference between investing in direct real estate and REITs is primarily a matter of individual investment goals and risk tolerance:
Direct real estate may appeal more to investors as a tangible asset with potential long-term appreciation and tax benefits, even though it has disadvantages such as illiquidity and management burdens.
In contrast, REITs are an attractive alternative for individuals looking for liquidity, diversification, and steady income without the troubles of property management. Their structure and market dynamics give them a higher return. So, choose between real estate and REIT based on your personal objectives for financial management, current market conditions, and risk appetite.
FAQs
1. What is the difference between investing in direct real estate and REITs?
Direct real estate investment involves purchasing physical property, such as residential or commercial real estate, with returns coming from rental income and capital appreciation. It requires a significant capital outlay, often in lakhs, and is less liquid, as selling property can be time-consuming. In contrast, REITs (Real Estate Investment Trusts) allow investors to invest in income-generating properties through shares traded on stock exchanges. REITs offer greater liquidity and diversification with lower entry costs, making them accessible to more investors.
2. How do the returns from real estate compare to those from REITs?
Direct real estate can provide returns primarily through rental income and capital appreciation over the long term. However, the growth rate may be slower and varies with market conditions. REITs, on the other hand, may offer a mix of rental income through dividends and capital appreciation. They generally have higher return potential due to their structured management and diversified property portfolio. While real estate returns hinge on property demand and location, REIT returns also reflect broader economic factors and asset management quality.
3. Which is more liquid, real estate or REIT investments?
REITs are significantly more liquid than direct real estate investments. Since REITs are traded on stock exchanges, they can be bought or sold quickly, providing easy access to cash without the lengthy process associated with selling physical properties. Real estate, by contrast, is highly illiquid. Selling a property involves time-intensive steps, including finding a buyer, paperwork, and legal processes, which can take months or even years. For investors needing quick access to funds, REITs are generally the better choice.
4. Are there tax benefits to investing in real estate or REITs?
Both investment options offer tax benefits, but in different ways. For direct real estate, tax benefits are available on home loans, such as deductions on interest payments under certain sections of the Income Tax Act in India. REITs, however, primarily provide income through dividends, which are partially tax-exempt but may be subject to withholding tax based on the investor’s tax bracket. Investors in real estate often benefit from tax reliefs, while REIT investors may face taxes on dividends depending on the income structure.
5. What factors should I consider when choosing between real estate and REITs?
When choosing between real estate and REITs, consider your investment goals, risk tolerance, liquidity needs, and management responsibilities. Real estate suits investors seeking tangible assets with potential long-term gains, especially in high-demand areas, though it requires significant upfront capital and involves maintenance responsibilities. REITs are ideal for those who prioritise liquidity, prefer lower entry costs, and seek diversification without the hassles of property management. Also, assess market trends, as REITs can be influenced by stock market volatility, while real estate follows broader property market trends.
