Discover the Truth About REITs: Unveiling the Reality Behind the Hype

REITs have been creating a buzz lately, captivating the attention of investors everywhere. However, it's time to take a step back and examine the true nature of these investments. In this post, we aim to shed light on the basics and present a different perspective.

So, what exactly are REITs? In a nutshell, a REIT is a company that purchases real estate, rents it out, and distributes 90% of the rental income as dividends (typically). You can participate in fractional investing with amounts as low as 500, 1000, or 2000 Rs, giving you a taste of the real estate market.

Now, let's engage in some logical thinking. How lucrative are REITs in terms of returns? Take Embassy REITs, one of India's oldest, for example. It has recorded a (-16%) return over the past year, with its initial launch price of 328 Rs in 2019 dropping to 311 Rs today.

To put it into perspective, the dividend yield stands at 9%. When you calculate the actual returns for investors, they turn out to be lower than fixed deposits (FDs). This raises an important question: can REITs truly deliver more than a 15% CAGR? Considering that the underlying asset class is real estate, it's time for some analysis.

Picture this: a REITs firm purchases real estate, rents it out, and pays out 90% of the generated rental income as dividends. But can they manage to rent out 100% of the available units? Can they somehow inflate rental prices to benefit their tenants?

Imagine you buy an office space and rent it out. What advantages do REITs firms possess over you? If your rental yield hypothetically stands at 10%, how on earth would a REITs firm promise you 15% returns?

Moreover, the opaqueness surrounding REITs adds to the concern. How much rent is collected through unofficial channels? Are some projects failing? What about the pressure to constantly expand the business while operating on high leverage? For instance, Embassy REITs has a Debt/Equity ratio of approximately 61%!

Now, as an investor, I urge you to ponder this: why would you choose REITs over something like the NIFTY 50, where the risks are significantly lower, and you can still generate a steady 12% return?

One frequently mentioned argument in favor of REITs is that they offer individuals with limited funds the chance to invest in real estate. While this may hold some truth, it's important to consider a simple analogy: you wouldn't purchase an expensive smartphone if it exceeded your budget. Similarly, not every investment opportunity is suitable for everyone.

In other words, it's crucial to be selective and discerning when deciding where to allocate your hard-earned money. Rather than investing in every available option, it's wiser to explore alternatives that align with your financial capacity and goals. By making informed choices, you can pave the way for a more pleasant and rewarding investment journey.

In conclusion, REITs might not be as attractive as they initially seem. It's crucial to carefully consider the risk-reward equation and the underlying dynamics of the real estate sector. So, let's delve deeper and explore the alternatives that offer more stability and potential for your investments.