For most Indian savers property feels familiar but large ticket size makes it hard to buy good quality commercial real estate. A real estate investment trust solves part of this problem. It lets many small investors pool money to own income generating properties in a simple listed format.

Let us break down how a real estate investment trust works step by step.

What is a real estate investment trust

A real estate investment trust is a trust that owns or holds a portfolio of properties such as office parks malls or warehouses. The trust raises money from investors issues units then uses that money to buy build or manage commercial property.

In India units of a real estate investment trust are listed on stock exchanges. You can buy or sell them through your demat account just like shares. This means you can get exposure to large grade A properties with a few thousand rupees instead of buying a full office floor.

How a REIT makes money

The engine of a real estate investment trust is rent.

1. Tenants sign lease agreements for space in the buildings
2. They pay regular rent and sometimes common area charges
3. The REIT receives this cash then pays expenses such as maintenance property tax interest on loans and management fees
4. Most of the remaining distributable cash is paid out to unit holders as income

So as a unitholder you get a share in rental income from a pool of properties without having to handle tenants paperwork or repairs.

There can also be capital gain over time if the value of the property portfolio rises and the market prices the units higher.

Structure in simple language

There are four main parties in a real estate investment trust

1. Sponsor
   Usually a real estate group that transfers properties to the trust and often holds a significant stake
2. Trustee
   Holds the assets for the benefit of investors and oversees that regulations are followed
3. Manager
   Runs day to day operations handles leasing finance and strategy
4. Unitholders
   Investors like you who buy units on the exchange and receive distributions

Regulations require a large part of assets to be in completed rent yielding properties. They also require most cash profits to be passed through to investors. This is what gives a REIT its income focus.

REITs compared with direct property and bonds

If you buy property directly you deal with stamp duty registration brokerage tenants repairs vacancy and legal issues. Exit can be slow and price discovery is not always clear.

With a real estate investment trust you avoid these hassles and you get diversification across many buildings and tenants. Liquidity is better because you can sell units on the exchange subject to trading volumes.

From a return profile REITs sit somewhere between equity and pure fixed income. They aim to pay regular income yet the unit price can move with interest rates demand for office space and market mood. For someone who already likes to invest in bonds a REIT can be seen as an income oriented satellite holding rather than your core safety bucket.

Bonds from strong issuers usually offer more predictable cash flows with defined maturity dates. REITs offer rental linked income with more uncertainty but also the possibility of growth in distributions over time if rents and occupancies rise.

What investors should check

Before you buy units of a real estate investment trust look at a few basics

1. Quality of properties
   Location building grade and infrastructure around the projects
2. Occupancy level
   Higher occupancy with reputable tenants reduces risk of income swings
3. Lease terms
   Average lease length and built in rent escalation clauses
4. Debt level
   Reasonable borrowing can support growth but too much leverage increases risk if rents fall
5. Distribution track record
   How stable and predictable the past payouts have been across years

Where a REIT fits in your plan

If you are early in your career you may use equity funds for growth invest in bonds or high grade debt for safety then add a small allocation to REITs for real estate exposure. If you are close to retirement you may still hold some REIT units but your main focus will likely stay with traditional bonds and deposits where cash flow is more stable.

The main idea is to treat a real estate investment trust as one more building block. Bonds give the base layer of safety equity gives long term growth and a REIT can add professionally managed commercial property to the mix without you having to buy a full office or shop on your own.