Should you be investing in REITs after the recent changes in Union Budget 2024-25?

First of all, REITs are investment securities are companies that administer real estate that generates income and herein the larger income generated is distributed among shareholders as dividend annually instead of reinvestment. Typically these are backed by equities and these equity REITs can invest across varied investment options available in the larger realty world. 

What has been the change in respect to REITs in Union Budget 2024?

In the Budget 2024 announcement made last week, Finance Minister Nirmala Sitharaman reduced the holding period for REITs for long-term capital gains tax computation. The change has also been brought in case of InvITs.

Should you be considering REITs now for portfolio diversification?

Vimal Nadar, Senior Director & Head, Research at Colliers India held that with the budgetary announcement of a reduction in holding period, REITs are now set to be treated at par with other listed equity shares. As investment in such asset classes increases, the retail investor should be prudent in assessing the historical performance. 

Shrinivas Rao, FRICS, CEO, Vestian highlighted that in the recent past, equities have been a preferred investment option compared to real estate assets due to lower tax liability. Equities benefit from a shorter holding period to qualify for long-term capital gains (LTCG), whereas real estate has a longer holding period of 24 months for LTCG. While the holding period to determine the LTCG remained the same at 24 months for properties, the tax rate was reduced from 20 to 12.5 per cent without indexation benefit under the Union Budget 2024-25. This move may lead to a fresh flow of funds in the real estate sector, including commercial assets. This may lead to better dividend payout and an increase in share prices for REITs.

Mr Atul Parakh, CEO of Bigul held that these securities continue to offer compelling investment options as : 
- Income-generating potential and lower correlation with other asset classes. 
- Reduced LTCG holding period from 36 months to 12 months, which may further be a good bet for investors for both income and growth.

Factors to look at while investing in REITs

While investing in REITs, investors should consider several factors that could potentially affect their returns, such as portfolios with stable financials, with a record of offering high dividends, diversified asset portfolios, reputed tenants, good occupancy rates, rolling renewals, etc, added Rao. Additionally, assessing the management team’s track record and the overall performance of the REIT is crucial.

Macroeconomic factors, such as the RBI's decision to maintain the repo rate at 6.50 per cent for the eighth consecutive time, should also be taken into account, as these can influence the stability and performance of the real estate industry, said Rao.

Additionally, investors should benefit from thorough scrutiny of tenant-mix of the underlying assets. It is always judicious to avoid portfolio concentration in a particular city or occupier segment, noted Nadar.