Real estate stocks vs REITs: Key differences and where to invest

view original post

Real Estate Investment Trusts (REITs) provide more advantages than investing directly in listed real estate company stocks, says Ramesh Nair, CEO of Mindspace Business Parks REIT.

Nair lists these as the key benefits of opting for REITs over realty stocks:   

First, REITs are structured as a business trust unlike listed real estate companies.

This means they are subject to specific regulations that focus on providing transparency and protecting investors. They are also structured to be more tax efficient.

Also Read: Why Keki Mistry thinks REITs are a good investment option

While real estate companies might engage in a variety of activities within the real estate sector (like development, management, and sales), REITs often specialise in owning and operating income-generating real estate.

Second, REITs need to ensure that their loan-to-value ratio (LTV), which indicates how much of the property is financed through debt, does not exceed 49%.

They are also required to furnish additional disclosures and meet specific credit rating requirements once the LTV crosses 25%.

The LTV cap of 49% helps in mitigating risk by preventing excessive debt and ensures that REITs maintain a conservative debt profile, which is crucial in real estate investments prone to market fluctuations.

Third, REITs have to distribute 90% of their net distributable cash flows (NDCF) to the unitholders.

Also Read: SEBI’s latest guidelines on REITs and InvITs

NDCF is the cash generated from a REIT’s operations that is available for distribution to its shareholders after covering all operational expenses and capital improvements.

Fourth, REITs have to ensure that 80% of the assets they invest in should either be complete or income generating.

This contrasts with real estate stocks, where companies might invest heavily in developments which may later face hurdles.

While direct investments in realty stocks often expose investors to higher risks from market volatility and leverage,  REITs can provide more predictable and steady income through dividends, making them a safer and more reliable investment option compared to direct realty stocks.