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Real Estate Investment Trusts: Is it a Potential Game Changer?

, May 21, 2015, 0 Comments

Real estate investment trusts MarketExpress-inIn August 2014, the capital market regulator of India, SEBI approved Real Estate Investment Trusts by clearing new norms for it. Since then a lot has been written and spoken about it. With every article or report that has been printed has left many questions in the mind of the reader. It has even escalated doubts in the heads of potential investors and realty players, whether as a financial product that has done wonders in the advanced and matured financial markets, would it be able to change the face of investing and financing in the real estate industry in India?

This is not the first attempt to introduce REITS in Indian markets. Previously in 2008, SEBI had issued draft regulations for introducing REITs. A previous attempt of introducing REITs didn’t take off, perhaps due to global slowdown and challenges in property markets in India.

Also then the proposed REITs being primarily passive; one cannot invest in development or mortgages, after due diligence and analysis of the offerings, it may induce policymakers to focus and directly channelize capital in infrastructure development.Today too none of the major challenges that were faced previously appear to have been eliminated completely. There is an urgent need to provide an alternate investment avenue to retail investors and asset monetization avenue to real estate players.

According to the guidelines, REITs shall be set up as trust and registered with SEBI. A sponsor (minimum shareholding 25%) will set up the REIT, appoint a manager to manage the operations and a trustee to oversee the operations. REIT will issue shares for ownership in one or multiple real estate projects, which can be traded by investors.

REITS shows signs to offer an additional investment avenue to Indian investors. At present, the retail investors in India with limited corpus cannot take exposure to prime real estate properties. With the introduction of REITs investors can take an exposure of prime quality properties available through it.

Benefits
The benefits could be
– Stable income stream (investment in completed rent generating properties and managed by professionals with relevant experience)
– Diversification of portfolio
– High liquidity (as REITs will be listed on stock exchanges),
– Exit to existing investors and thus availability of risk capital for other productive purposes
– Long term inflow of funds (funds seeking stable income such as pension funds, insurance companies).

The current market of investments only provides investors with opportunities to invest in real estate through individual properties, listed real estate players and through real estate mutual funds. These opportunities require large capital and offer little liquidity (to invest in individual properties), adding to these things there are not many active mutual funds, where one can take advantage. There is quite a bit of risk element attached to real estate stocks.

REITs, on the other hand, comes with benefits of listing, stable source of income for investors, diversification of assets, small initial investment requirement professionally managed, no project execution risk, though rent rollover risk and market risk remains.

It may look the “best “ investment option for real estate investing for an individual investor; they too come with its own sense of challenges. At, present the property taxes in India are high This could be detrimental to the performance of the REITs that would directly impact its yield and thus its attractiveness is again a question mark for the investor.

An Indian real estate market is filled with landmines – ambiguity over the title of the property. Due to this the assets available for REITs would initially be limited. Also, the high stamp duty structure will also affect the capital gains of the REITs assets.

REIT is a new offering in the Indian capital markets. This product has to be properly regulated with easy recourse to investors. Though, SEBI has taken care in its REITs regulations to ensure watertight regulations and necessitated high entry barrier for initial years to maintain transparency, accountability and attract serious sponsors.

Any misgovernance and inadequate recourse to investors may erode the faith of investors that would have a negative impact for a long time. Notwithstanding the challenges, the benefits likely to be offered by REITs are significant. The product with proper backing by policy makers may flourish and over the period along with successful development may offer competition to international REITs market.

Kirti Khanduja also contributed to this article.