REITs promise stable income, but investors must brace for volatility

Real estate investment trusts (REITs) distributed about ₹1,559 crore to 2.7 lakh unit holders in the first quarter of 2025-26, 13 per cent higher than the ₹1,371 crore distributed in the same quarter last year. The number of unit holders rose from 2.45 lakh to 2.7 lakh, attesting to their growing popularity.

 

REITs invest mostly in offices and malls and are regulated by the Securities and Exchange Board of India (Sebi).

 

REITs’ appeal

 

REITs are positioned as total-return products. “They offer regular income through rental distributions. By regulation, REITs must distribute at least 90 per cent of their cash flows to unit holders once every six months. However, Indian REITs have been making quarterly payouts,” says Pratik Dantara, executive committee member, Indian REITs Association.

 

High-quality tenants help provide stable cash flows. “With distribution yields typically in the 6–7 per cent range, and the possibility of capital appreciation, REITs present an attractive total-return profile in the mid-teens,” says Abhishek Agrawal, chief financial officer (CFO), Embassy REIT.

 

“Investors can expect a minimum annual capital appreciation of 3–5 per cent,” says Vishal Iyer, CFO, Integrow Asset Management Company.

 

Anyone with a demat account can invest. “Since REITs are listed, investors benefit from transparency and the liquidity to exit whenever needed,” says Sharad Mittal, founder and chief executive officer, Arnya Real Estates Fund Advisors.

 

They allow investors to diversify their portfolios. “Investors can benefit from real estate’s lower correlation with other asset classes,” says Bhavya Bagrecha, fund manager, Wealth Company Asset Management.

 

“When stock markets are volatile due to economic uncertainties, well-located commercial properties often maintain their rental income streams,” says Chanchal Agarwal, chief investment officer, Equirus Credence Family Office.

 

Investors also avoid operational hassles. They receive rental income proportionate to their investment while professional managers handle tenant relationships, maintenance, and property operations.

 

Their downsides

 

REITs face market and sector-specific risks. “Changes in demand for office or retail space can influence performance,” says Dantara. Factors such as interest rates, economic cycles, and property market trends can also affect performance.

 

Concentration risk applies as well. “Most invest in grade-A offices that are concentrated in a few cities; hence, any negative local economic event can have a disproportionate impact,” says Iyer.

 

Interest rate sensitivity is another factor. “When rates rise, REIT valuations face pressure as their dividend yields become less attractive compared to risk-free alternatives,” says Agarwal.

 

This category is exposed to occupancy risk, as witnessed during the pandemic.

 

Who should consider REITs?

 

REITs suit investors seeking real estate exposure with modest capital. “They allow investors to participate in a diversified portfolio of commercial assets with a much smaller investment than required in direct ownership,” says Mittal.

 

They appeal to those looking for a steady income without managing properties. “REITs are suitable for investors seeking regular income and real estate exposure without managing physical property, especially non-resident Indians (NRIs) and retirees,” says Yash Sedani, assistant vice-president, investment strategy, 1 Finance.

 

Their quarterly cash flows can supplement pension income. “Unlike fixed deposits, where returns remain static, REIT distributions can grow over time as rental rates increase,” says Agarwal.

 

Who should steer clear?

 

Investors who want high capital appreciation should avoid REITs. “Since they distribute most of their income as dividends, capital appreciation is usually lower compared to growth stocks,” says Bagrecha.

 

Those with a low risk appetite may also stay away. “Those who dislike market volatility should avoid REITs,” says Sedani.

 

Investors seeking high liquidity should be cautious. “REITs may not always have the same liquidity as large-cap stocks, particularly during periods of market stress,” says Agarwal.

 

Checks to run

 

·         Assess quality and location of properties held by REITs (prime properties in established business districts perform better)

 

·         Ensure properties are geographically diversified

 

·         Scrutinise tenant quality, diversification across industries, and lease expiry patterns

 

·         Review management and sponsor’s track record, fee structure, and payout history

 

·         Evaluate debt levels, interest coverage, past performance, and liquidity on exchanges