Why Warren Buffett Doesn't Invest in REITs, But Why You Should

Warren Buffett avoids REITs due to lack of competitive edge, tax inefficiency, and low returns. However, individual investors may find REITs attractive for liquidity, diversification, and professional management. In India, REITs are gaining traction as an accessible, tax-efficient, and regulation-driven alternative to physical real estate ownership.

Warren Buffett, the renowned investor and chairman of Berkshire Hathaway, has long steered clear of Real Estate Investment Trusts (REITs). Despite their proven track record of providing liquidity and diversification, Buffett's massive investment empire has held only minor positions in REITs like STORE Capital and Seritage Growth Properties. The reasons for this avoidance are multifaceted and rooted in Berkshire Hathaway's investment philosophy, tax structure, and competitive edge.

One of the primary reasons Buffett avoids REITs is the lack of a competitive advantage. Both Buffett and his long-time partner Charlie Munger have emphasized the importance of investing in areas where they believe they possess an edge. In the highly competitive and efficient real estate market, they argue that there are few mispriced assets to be found. Munger once stated, "We don’t have any competitive advantage over experienced real estate investors in the field."

Another key factor is the tax structure. Berkshire Hathaway, structured as a taxable C-corporation, faces an additional layer of corporate tax on any income earned from REITs or real estate investments. This tax inefficiency negates the tax efficiency that makes REITs attractive to individual investors. According to Munger, this structure makes real estate a "lousy investment" for them.

Additionally, Buffett seeks businesses that can generate high unleveraged returns on invested capital and reinvest those profits at similar rates over time. Real estate, with its extensive use of leverage and cap rates hovering in the low-to-mid single digits, rarely meets this threshold. For Berkshire Hathaway's long-term compounding model, these returns are not compelling enough.

However, what doesn't work for Berkshire Hathaway might still work for individual investors. In India, REITs are gaining traction as an accessible, tax-efficient, and regulation-driven alternative to physical real estate ownership. Thanks to their pass-through structure, income generated by Indian REITs is taxed only at the investor level, avoiding the problem of double taxation and boosting effective returns. Dividend payouts from REITs are typically tax-free in the hands of the investor, provided the underlying Special Purpose Vehicles (SPVs) have already paid corporate tax. This makes REIT income one of the cleaner, more efficient sources of cash flow for individual investors, particularly those looking for passive income.

On capital gains, REIT units held for more than one year qualify as long-term capital assets and are taxed at just 10% on gains above Rs 1 lakh, much lower than the rates typically applied to physical property sales or other equity-like investments. Short-term capital gains (on units sold within one year) are taxed at 15%.

Moreover, REITs listed in India are required by the Securities and Exchange Board of India (SEBI) to distribute 90% of their net distributable income, ensuring steady income streams for investors. They also offer better liquidity and transparency than physical real estate—REIT units trade on stock exchanges just like shares, allowing investors to enter and exit positions with ease.

GST, often a complicating factor in real estate investments, does not directly affect the rental income or the returns distributed to REIT investors. And while Tax Deducted at Source (TDS) does apply to some components of REIT income, the overall structure remains efficient and investor-friendly.

So, while Warren Buffett's reasons for avoiding REITs stem from Berkshire Hathaway's scale, tax structure, and investment philosophy, individual investors in India may find REITs attractive due to their tax efficiency, liquidity, and regulatory backing. With favorable taxation, SEBI-backed transparency, and growing institutional interest, REITs could be a smart addition to your portfolio, even if they’re not part of Buffett’s.

References:
[1] https://economictimes.indiatimes.com/markets/stocks/news/3-reasons-why-warren-buffett-doesnt-buy-reits-but-heres-why-that-shouldnt-stop-you/articleshow/121704187.cms
[2] https://www.nasdaq.com/articles/warren-buffett-detailed-fundamental-analysis-lrcx-41