Types of REITs in India: Equity, Mortgage & Hybrid Explained

Real Estate Investment Trusts (REITs) have become a popular investment option in India, offering investors a way to earn income from real estate without directly owning property. However, not all REITs are the same. Depending on their structure and investment focus, REITs can be classified into three main types: Equity REITs, Mortgage REITs, and Hybrid REITs.

In this blog, we’ll explore each type of REIT in detail, including how they work, their benefits, and examples to help you understand which type might be best for your investment goals.

What are REITs?

REITs are companies that own, operate, or finance income-generating real estate properties. They pool money from multiple investors to purchase and manage properties like office spaces, malls, and warehouses. In return, investors earn rental income and capital appreciation.

In India, REITs are regulated by the Securities and Exchange Board of India (SEBI) and are listed on stock exchanges. Examples include Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust.

Types of REITs in India

1. Equity REITs

Equity REITs are the most common type of REITs in India. They own and manage income-generating real estate properties, such as office buildings, shopping malls, and warehouses.

How Equity REITs Work

• Equity REITs generate income primarily through rental income from their properties.
• They may also earn profits by selling properties that have appreciated in value.
• Equity REITs are required to distribute at least 90% of their income as dividends to investors.

Benefits of Equity REITs

• Steady Income: Equity REITs provide regular dividends from rental income.
• Capital Appreciation: Investors can benefit from the appreciation of property values over time.
• Diversification: Equity REITs invest in multiple properties, reducing risk.

Examples of Equity REITs in India

• Embassy Office Parks REIT: Focuses on office spaces in major cities like Bengaluru and Mumbai.
• Mindspace Business Parks REIT: Owns and operates business parks and office spaces.

2. Mortgage REITs

Mortgage REITs (mREITs) do not own physical properties. Instead, they invest in mortgage-backed securities (MBS) or provide loans to real estate developers and property owners.

How Mortgage REITs Work

• Mortgage REITs earn income from the interest on loans or mortgage-backed securities.
• They may also profit from the sale of MBS or loans.
• Mortgage REITs are highly sensitive to interest rate changes.

Benefits of Mortgage REITs

• High Dividend Yields: Mortgage REITs often offer higher dividend yields compared to equity REITs.
• Liquidity: Since they invest in financial instruments, mortgage REITs are more liquid than equity REITs.

Risks of Mortgage REITs

• Interest Rate Sensitivity: Rising interest rates can reduce the value of mortgage-backed securities and increase borrowing costs.
• Credit Risk: Defaults on loans can impact returns.

Examples of Mortgage REITs

While mortgage REITs are common in markets like the US, they are not yet prevalent in India. However, as the REIT market evolves, we may see the introduction of mortgage REITs in the future.

3. Hybrid REITs

Hybrid REITs combine the features of both equity REITs and mortgage REITs. They invest in a mix of physical properties and mortgage-backed securities or loans.

How Hybrid REITs Work

• Hybrid REITs generate income from both rental income and interest income.
• They offer a balanced approach by diversifying their investments across physical real estate and financial instruments.

Benefits of Hybrid REITs

• Diversification: Hybrid REITs reduce risk by investing in both physical properties and financial instruments.
• Balanced Returns: Investors can benefit from both rental income and interest income.

Risks of Hybrid REITs

• Complexity: Managing a mix of physical properties and financial instruments can be challenging.
• Market Sensitivity: Hybrid REITs are exposed to risks from both the real estate market and interest rate fluctuations.

Examples of Hybrid REITs

Hybrid REITs are not yet common in India, but they could emerge as the REIT market matures.

Comparison of REIT Types

Aspect	Equity REITs	Mortgage REITs	Hybrid REITs
Primary Income Source	Rental income and property sales.	Interest income from loans or MBS.	Rental income and interest income.
Risk Level	Moderate.	High (due to interest rate sensitivity).	Moderate to high.
Dividend Yield	6–8% annually.	8–12% annually.	7–10% annually.
Liquidity	Moderate.	High.	Moderate.
Examples in India	Embassy Office Parks REIT, Mindspace Business Parks REIT.	Not yet prevalent.	Not yet prevalent.

Which Type of REIT is Best for You?

Choose Equity REITs If:

• You want steady income from rental properties.
• You prefer moderate risk with potential for capital appreciation.
• You’re looking for diversification in your portfolio.

Choose Mortgage REITs If:

• You’re comfortable with higher risk for potentially higher returns.
• You want to invest in financial instruments rather than physical properties.
• You understand the impact of interest rate changes on your investments.

Choose Hybrid REITs If:

• You want a balanced approach with exposure to both physical properties and financial instruments.
• You’re comfortable with moderate to high risk.
• You’re looking for diversified income streams.

Conclusion

REITs in India offer a unique opportunity to invest in real estate without the hassles of property ownership. While equity REITs are the most common and suitable for most investors, mortgage REITs and hybrid REITs provide additional options for those seeking higher returns or diversified income streams.

As the Indian REIT market continues to grow, we may see more variety in REIT types, giving investors greater flexibility to choose based on their financial goals and risk appetite. Always consult a financial advisor before investing to ensure your portfolio aligns with your objectives.

FAQs: Types of REITs in India – Equity, Mortgage & Hybrid Explained