REITs Demystified: Small Investors’ Gateway to India’s Commercial Real Estate Boom

Commercial real estate in India is experiencing a significant growth spurt, encompassing offices, malls, warehouses, and data centers. However, for most investors, buying such properties directly has traditionally been out of reach. This is where Real Estate Investment Trusts (REITs) are making a significant impact.

Owning a Piece of India’s Most Premium Offices — Without Buying a Building

A REIT is a straightforward yet powerful investment structure that allows ordinary investors to own fractional units of large, income-generating commercial properties. “REITs represent fractional ownership of rented commercial real estate,” explains Ashish Shankar, MD & CEO of Motilal Oswal Private Wealth. “If you go to buy a commercial property directly, it could cost ₹10-30 crore. REITs allow retail investors to own units of large pre-leased assets.”

These assets include office parks leased by top global firms, Grade-A malls, and even new-age data centers — all managed professionally.

How REITs Make Money for Investors

Think of REITs as income-generating financial assets backed by real estate. The returns broadly come from three key sources:

Regular Rental Income: By regulation, REITs must keep at least 80% of their portfolio in income-generating assets. They collect rent from tenants — typically large MNCs, software companies, and global capability centers — and pass most of that income to investors.

Mandatory Payouts: SEBI rules require REITs to distribute at least 90% of their net cash flows to unit holders. This ensures predictable, steady income — similar to dividends.

Rental Growth and Capital Appreciation: Commercial leases usually include a 15% rent escalation every three years. This automatically pushes up the REIT’s income base — and in turn, its market value.

“When you combine rental yields, periodic rent increases, and capital appreciation, you get a base yield of around 11-13% over time,” says Vishal Dhawan, Founder & CEO, Plan Ahead Wealth Advisors.

The Role of Interest Rates — Why REITs Can Behave Like Bonds

REITs are also sensitive to changes in interest rates, much like bonds. “When rates fall, the value of REITs tends to go up,” Shankar points out. “That’s because investors are willing to pay more for the same yield — a concept called cap rate compression.”

Conversely, when rates rise, REIT values may dip temporarily. But for long-term investors, these cycles usually even out over a seven-to-ten-year horizon.

Why Patience Pays Off with REITs

Dhawan advises investors to treat REITs as a long-term asset class. “The first REIT, Embassy, got listed in 2019. Since then, we’ve seen both strong years and subdued ones — during COVID and rate hikes. Those who stayed invested for longer periods have earned 11-13% annualized returns,” he says.

Short-term chasers, on the other hand, may get caught by timing cycles — especially after a year when REITs have already risen 20–25%.

Hybrid Asset Class Between Stocks and Bonds

REITs occupy a middle ground between fixed income and equities. Around 60–70% of their returns come from rental income, while 30–40% comes from capital appreciation.

That makes them ideal for investors looking for steady income with a touch of growth potential — especially in a country where real estate is on track to become a $5–10 trillion sector by 2047, according to CII estimates.

Bottom Line

For investors who want exposure to India’s booming commercial real estate market — without the headaches of buying, leasing, or managing property — REITs offer a transparent, regulated, and income-generating alternative.

As Shankar sums it up, “REITs are a great way to participate in the real estate growth story — but they reward those who stay invested through cycles.”