REITs vs FDs: Which is better for returns and long-term investing?

REITs vs FDs: Real Estate Investment Trusts (REITs) are gaining prominence as a good option compared to FDs owing to several reasons, such as steady income flow, value appreciation, and tax benefits, according to Preeti Chheda, Chief Financial Officer at Mindspace Business Parks REIT and Executive Committee Member of the Indian REIT Association.

Preeti Chheda, in a conversation with Zee Business, elaborated on the key differences between REITs and FDs in respect of returns, tax structure, and risks associated with each investment.

REITs vs FDs: Returns compared

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As pointed out by Chheda, there is a definite difference between the returns generated by both investment instruments:

FDs generally generate a yearly return of approximately 5 to 6 per cent, wherein the investor receives regular interest, which is completely taxable based on the income tax slab.

On the other hand, Indian REITs have earned an average yearly return of 15 to 16 per cent over the last five to six years, primarily due to a combination of:

• Approximately 7 per cent income return
• 7 to 8 per cent capital appreciation

This system makes REITs distinct from fixed-income investments like FDs since they only provide interest-based returns without capital appreciation.

How is REIT income structured?

In discussing how payouts were made, Chheda mentioned that REITs pay out money to investors in the form of 'distributions'. These distributions comprise three parts:

• Dividend
• Interest income
• Return of capital

For example, in a total distribution of Rs 20:

• Rs 12 may be dividend
• Rs 2 interest income
• Rs 6 return of capital

She added that investors should focus on the total distribution amount, as it reflects the overall return generated by the REIT portfolio.

Taxation advantage over FDs

A major advantage of REITs over FDs lies in taxation efficiency.

While FD interest income is fully taxable based on an investor’s tax bracket, Chheda noted that dividend income from REIT distributions is tax-free, making REITs more efficient from a post-tax return perspective.

However, she clarified that taxation varies across different components of REIT distributions, which may include taxable elements depending on their classification.

Why REITs offer stable income?

REITs generate revenue from commercial property holdings, which are usually leased to international and local businesses under long-term leasing arrangements of 9–10 years.

Some examples of such tenants include multinational and national organizations, including Google, Amazon, and IBM among others, thereby generating a regular flow of revenues for the property owners.

As per Chheda, this model ensures a steady cash flow stream, rendering REITs a relatively stable investment option even amidst unstable economic times.

Additionally, she mentioned that during the COVID-19 period, office REITs continued to earn 99.9 percent of their revenue streams.

REITs risk factors: Moderate risk, not risk-free

Describing REITs as a 'moderate-risk, moderate-return' product, Chheda said they are not risk-free like FDs.

Key risks include:

• Temporary vacancy in properties
• Time taken to replace tenants
• Normal business and occupancy-related fluctuations

However, she emphasised that risks are mitigated due to:

• Large and diversified property portfolios
• Pan-India asset distribution
• Long-term lease structures with reputed tenants

These factors reduce the probability of income disruption across the entire portfolio.

How to choose the right REIT?

Chheda explained that investing in REITs is similar to buying listed equities.

REITs are traded on BSE and NSE, and investors can purchase them through brokerage platforms.

Selection can be based on:

• Type of asset (office spaces vs retail/shopping centres)
• Geographic exposure of the portfolio
• Investment preference and sector outlook

She also noted that India currently has five listed REITs, with a sixth expected to be listed in the coming months, expanding options for retail investors.

REITs as a retirement and long-term investment tool

According to Chheda, REITs are especially good for retirement savings because they offer regular quarterly payments in addition to possible growth in capital gains.

As she pointed out, in retirement, after the cessation of income, REITs will act as a reliable source of income generation, which will be applicable for all types of investors regardless of their age, especially those planning long-term financial security.

REITs vs FDs: Key takeaways for investors

Although fixed deposits continue to remain a top choice when it comes to safety of investment and certainty of returns, REITs is another form of investment opportunity that promises high return potential, tax efficiency, diversification in real estate, and steady income flow.

As Chheda summarised, REITs provide a structured and relatively stable cash-flow-based investment avenue, making them an increasingly relevant option for retail investors seeking long-term wealth creation beyond traditional fixed-income products.