Real estate industry experts feel that investors should possess a thorough understanding of the pros and cons regarding investments via REITs (real estate investment trusts) or direct commercial property ownership. The latter approach ensures more control and prospective returns, while the former approach ensures higher diversification of the portfolio and better liquidity.
If an investor acquires the asset straight away, direct ownership of commercial property will enable full control over all property-related aspects. Some experts feel that direct ownership enables higher prospective investment returns, if the property is chosen with care. Yet, this strategy necessitates extensive knowledge or expert property guidance from an industry expert.
How Do the Two Options Measure up?
Direct ownership is also synonymous with other duties including relationships with tenants, maintenance, and adherence to regulatory and legal guidelines. This may require more resources and time on the investor’s part. At the same time, commercial properties are comparatively costlier than their residential counterparts, making them viable only for investors with higher capital reserves.
REITs, on the other hand, are an alternative method of investing in commercial property. These enable people to get fractional ownership of big-ticket commercial assets. Some experts feel that REITs ensure several benefits including proper adherence to regulatory norms, higher liquidity, lower ticket size for investments, better diversification, and also counterparty risk redressal. REITs help investors spread their portfolios throughout numerous commercial assets. They are also managed professionally by experts who take care of aspects like property management, acquisition, selection, and leasing. REITs also enable a steady income via dividends, along with offering capital appreciation potential in the future. However, they are subject to fluctuations in the market and may not always perform in sync with the overall realty market.
see also – Real Estate Investment Trust (REIT): How it Works?
What the Experts Advise
The Co-Founder and CBO-NRI Sales, Square Yards, Anupam Rastogi, feels that REITs are highly convenient choices for smaller investors who wish to foray into real estate investments with lower capital reserves. He states that REITs give them a chance to get attractive returns along with steady income and portfolio diversification with the risk element being comparatively lower in this scenario. He also feels that REITs allow asset diversification while the dividend generation and capital appreciation features are also beneficial for investors. With REITs being traded on the stock exchange, they are also highly liquid and offer more flexibility in terms of selling them off if investors require the same.
He also feels that REITs are currently newer investment propositions in the market and are vulnerable towards market movement and fluctuations in value. Also, they do not get any tax advantages, since the income and dividends are taxed.
Hence, direct investments may seem tempting for those with more capital reserves who wish to buy, manage, and sell these properties as per their wishes. They will profit from appreciation and rental income along with earnings of any business that is dependent on the commercial property. Rental yields could be around 6-7% although the monthly rents may go up or down based on market trends. Yet, liquidity is much lower and selling a property may require several months to years.
Investors should take the final decision, depending on their cash reserves, financial circumstances, future investment objectives, and risk appetite. Taking professional advice from industry experts is also recommended.
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Published Date: June 2, 2023
