THE DISADVANTAGES OF REITS OR FRACTIONAL INVESTMENT PROPERTIES IN COMPARISON TO THE ADVANTAGES OF DIRECT PROPERTY INVESTMENT CONTENT CASE STUDY;

Real Estate Investment Trusts (REITs) and Fractional Investment Properties (FIPs) have grown in

favour as alternative real estate investment vehicles. While they have some advantages, they also

have disadvantages when compared to direct property investing. Here are some of the drawbacks of

REITs and FIPs in comparison to the advantages of direct property investment: Control is restricted:

One of the most significant disadvantages of REITs and FIPs is that investors have no control over the

property. The investor has complete control over the property in a direct property investment and

can make whatever improvements they think necessary to maximise their returns.

1. Limited Flexibility: Because REITs and FIPs are traded on stock exchanges, investors have limited

flexibility in entering and exiting investments. Direct property investing, on the other hand, provides

greater flexibility because investors can sell their property at any moment.

2. Low profits: While REITs and FIPs have the potential for high profits, they also have greater fees

and lower returns than direct property investing. This is because the fees connected with

administering REITs and FIPs can cut into investors returns.

3. Market Dependence: REITs and FIPs are subject to market conditions as well as the overall health

of the economy. This means that if the real estate market suffers a slump, investors returns may

suffer.

Direct property investment, on the other hand, has various advantages, including:

1. Total Control: As previously stated, direct property investment provides entire control over the

property. This means that investors can make improvements to the property in order to raise its

value or rental income.

2. larger Returns: Because there are no management fees to pay, direct property investment has the

potential for larger returns. Furthermore, rental income from direct property investment is often

larger than profits from REITs and FIPs.

3. Tax Advantages: Direct property investment provides various tax advantages, including mortgage

interest and property tax deductions. This can assist investors in lowering their tax burden and

increasing their overall earnings.

4. Diversification: Direct property investment helps investors to diversify their portfolios by investing

in various types of properties in various areas. This can help to reduce risk while increasing earnings.

To summarise, while REITs and FIPs have advantages, they also have restrictions when compared to

direct property investment. Before determining which choice is best for them, investors should

examine their investment goals and risk tolerance.

Examine This Case: Mr. X, an investor, chose to put his money into a REIT that held a commercial

building. He put Rs. 10 lakhs into the REIT and obtained a 7% annual return. However, the

management expenses linked with the REIT lowered his returns to 5% over time. Furthermore, as

the real estate market fell, the value of the REIT shares fell as well, resulting in a further loss for

Mr. X. Mr. Y, on the other hand, chose to invest directly in a residential property. He paid Rs. 50

lakhs for the property and rents it out for Rs. 30,000 per month. He made a 6% yearly return after

deducting his expenses such as property taxes, insurance, and maintenance fees. The property

worth rose to Rs. 80 lakhs over time, resulting in a capital gain of Rs. 30 lakhs when he sold it. Mr. Y

overall returns were higher than Mr. X, and he also benefited from complete control and tax

advantages.

Case study: Mr. A purchased a commercial real estate investment trust (REIT). He was drawn in by

the prospect of consistent rental income as well as capital appreciation. However, due to market

changes and rising competition in the commercial real estate industry, the REIT performance has

decreased over the course of several years. Mr. A was unable to make direct management choices or

make changes to the properties, and he was subject to management fees and other charges that

drained his profits. Mr. B, on the other hand, invested directly in a modest commercial property and

was able to make modifications, negotiate leases, and maximise rental income. He was also able to

benefit from tax breaks and diversify his portfolio by investing in a variety of properties with varying

qualities and locations. As a result, Mr. B outperformed Mr. A in terms of returns and control over

his investment.