(REITs) PROS & CONS
PROS & CONS
1. LOWER THRESHOLD LIMIT -
Threshold limit of just Rs 2 lakh has been kept for investment in Reits
2. GOOD PORTFOLIO DIVERSIFICATION -
These products are a good portfolio diversification tool.
3. MORE SAFETY -
Reits would be safer for individual investors who would otherwise invest on their own in some property or land parcel. Investing in Reits would be passive investing in real estate market.
4. SAFEGAURDS -
There are several other safeguards as well. Not less than 80 per cent of the value of the Reit assets shall be in completed and revenue-generating properties – a good move because it ensures that investors enter an instrument that is already generating revenues and not something that will only promise to generate revenues in the future. This will bring down the risk considerably because the entire investment is in under-construction properties.The promise the moon to investors can hurt badly, if the construction gets stuck due to litigation or other issues. Similarly, Reits cannot invest more than 60 per cent of the value of assets in two projects, is another safeguard.
5. ADVANTAGE OF DIVIDEND DISTRIBUTION -
Reits will give an added advantage of dividend distribution on an annual basis and that too, 90 per cent of distributable post-tax income.
6. DIVIDENDS ENTIRELY TAX FREE -
At present, dividends would be subject to the dividend distribution tax (DDT) at 16.995 per cent to be paid by REITs. Dividend subject to DDT is exempt from tax in the hands of the investors.
7. RETURNS -
The yield, as a result of dividends distribution will be 8-9 per cent. ADD to that, capital appreciation and the total annualised returns may come to 14-15 per cent. Though post-tax returns depend on the overall yield, they will certainly be higher than fixed deposits by around three per cent.
8. EASY LIQUIDITY -
The liquidity may also not be an issue because they will be listed at the stock exchanges.
9. RISK FACTOR -
Reits will be riskier than debt products because of the underlying security is real estate, which can take a hit when economic conditions aren’t very suitable since the exposure will only be in commercial properties.
10. TAXATION -
The long-term and short-term capital rates of taxation are unclear. However, the taxation of Reits may have some similarity to that for listed equities, with long-term capital gains on transfer of Reits being exempt (provided it has been subject to STT), and short-term capital gains being subject to a 15 per cent tax, plus applicable surcharge and cess.
However, Reits units to qualify as a long-term capital asset, would need to be held for a period of three years.
Liquidity, relatively low entry-level investments, stable income generation, potential capital appreciation - all these are obvious benefits from Reits.