Regardless of actual property being a time-tested wealth builder and REITs providing liquidity, diversification, {and professional} administration, Berkshire Hathaway has hardly ever invested in them. Notable exceptions embody minor positions in STORE Capital and Seritage Progress Properties. However in comparison with Berkshire’s deep bets on companies like Apple, Coca-Cola, and American Specific, the REIT publicity is negligible.
Why? Based on Buffett and his longtime associate Charlie Munger, the explanations are simple.
One key purpose is the dearth of a aggressive edge. Buffett and his longtime associate Charlie Munger had at all times centered their investments in areas the place they believed they’ve a bonus. Within the extremely aggressive and environment friendly actual property market, Buffett argues that there’s little alternative to search out mispriced belongings. As Munger as soon as stated, “We don’t have any aggressive benefit over skilled actual property buyers within the discipline.”Then there’s the tax angle. Berkshire Hathaway, structured as a taxable C-corporation, faces an additional layer of company tax on any revenue it earns from REITs or actual property investments. This wipes out a lot of the tax effectivity that makes REITs enticing to particular person buyers. As Munger as soon as defined, this construction makes actual property a “awful funding” for them.
One other key purpose is returns. Buffett seeks companies that may generate excessive unleveraged returns on invested capital and reinvest these earnings at comparable charges over time. Actual property hardly ever meets this threshold. Given the in depth use of leverage and the recognition of actual property as a perceived secure asset class, cap charges — primarily the unleveraged return — are inclined to hover within the low-to-mid single digits. For Berkshire’s long-term compounding mannequin, that’s not compelling sufficient.
However what doesn’t work for Berkshire Hathaway may nonetheless give you the results you want.
In India, REITs are gaining traction as an accessible, tax-efficient, and regulation-driven different to bodily actual property possession. Due to their pass-through construction, revenue generated by Indian REITs, akin to lease or dividends from Particular Objective Automobiles (SPVs), is taxed solely on the investor degree, not on the REIT degree. This avoids the issue of double taxation and boosts efficient returns.Dividend payouts from REITs are usually tax-free within the fingers of the investor, offered the underlying SPVs have already paid company tax. That makes REIT revenue one of many cleaner, extra environment friendly sources of money stream for particular person buyers, significantly these in search of passive revenue.
On capital beneficial properties, REIT items held for multiple 12 months qualify as long-term capital belongings and are taxed at simply 10% on beneficial properties above Rs 1 lakh, a lot decrease than the charges usually utilized to bodily property gross sales or different equity-like investments. Brief-term capital beneficial properties (on items offered inside one 12 months) are taxed at 15%.
Furthermore, REITs listed in India are required by the Securities and Alternate Board of India (SEBI) to distribute 90% of their internet distributable revenue, making certain regular revenue streams for buyers. Additionally they provide higher liquidity and transparency than bodily actual property—REIT items commerce on inventory exchanges identical to shares, permitting buyers to enter and exit positions with ease.
GST, usually a complicating consider actual property investments, doesn’t immediately have an effect on the rental revenue or the returns distributed to REIT buyers. And whereas Tax Deducted at Supply (TDS) does apply to some parts of REIT revenue, the general construction stays environment friendly and investor-friendly.
So the underside line is that Warren Buffett’s causes for avoiding REITs stem from Berkshire Hathaway’s scale, tax construction, and funding philosophy. However for Indian buyers, significantly these looking for regular revenue, tax effectivity, and a liquid different to conventional actual property, REITs current a compelling case. With beneficial taxation, SEBI-backed transparency, and rising institutional curiosity, REITs might be a wise addition to your portfolio, even when they’re not a part of Buffett’s.
Additionally learn | Warren Buffett’s biggest investment isn’t Apple, BofA or Coca-Cola — it’s a stock hidden in plain sight
(Disclaimer: Suggestions, recommendations, views and opinions given by the specialists are their very own. These don’t symbolize the views of The Financial Occasions)
