The Indian real estate sector has been lucrative for savvy investors over the last decade, but it has not been without accompanying uncertainties. The introduction of real estate investment trusts (REITs), will provide a platform that will allow all kinds of investors (even those with smaller budgets) to make safe and rewarding investments in the Indian property market.
With REITs, investors can start with as small a sum as Rs 2 lakhs, to secure units in exchange.
The REIT platform has already been approved by the Securities and Exchange Board of India (SEBI) and like mutual funds, it will pool the money from all investors across the country. The money collected from the REIT funds, will subsequently be invested in commercial properties to generate income.
A REIT will need to be registered via an initial public offering (IPO). REIT units will have to be listed with exchanges and consequently, traded as securities.
The SEBI board has kept the minimum asset sizes to be invested in, at Rs 500 crores. However, the minimum issue size would have to be less than Rs 250 crores. As with stocks, the investors will be able to buy the units from either primary and/or the secondary markets.
How does a REIT work?
REIT is a process to generate funds from a lot of investors, to directly invest in properties like offices, residential units, hotels, shopping centers, warehouses, etc. All REITs will be listed with the stock exchanges, as they would be structured like trusts. Consequently, REIT assets will be held with independent trustees for unit holders/investors.
Role of the trustees in a REIT
The trustees of REITs have defined duties, which typically involve ensuring compliance and adherence to all applicable laws that protect the rights of the investors.
The objective of REITs
A REIT’s objective, is to provide the investors with dividends that are generated from the capital gains accruing from the sale of the commercial assets. The trust distributes 90% of the income among its investors via dividends.
Apart from minimum entry level, a REIT is supposed to provide diversified and safe investment opportunities with reduced risks and under a professional management, to ensure maximum return on investments.
The advantages of REITs include:
- Income dividends: 90% of distributable cash, at least twice in a year.
- Transparency: REITs will showcase the full valuation on a yearly basis and will also update it on a half-yearly basis.
- Diversification: According to the guidelines, REITs will have to invest in a minimum of two projects with 60% asset value in a single project.
- Lower risk: At least 80% of the assets will have to be invested into revenue-generating and completed projects. The remaining 20% include under construction projects, equity shares of the listed properties, mortgage-based securities, equity shares that derive a minimum of 75% of income from government securities or G-secs, money market instruments, cash equivalents and real estate activities.
Although the concept of REITs, has been in the news for some time, the regulations that have been rolled out so far, have not helped to increase their popularity. Exemption of REITs from tax on the distribution of dividends, would make it much more attractive for investors.
According to a recent report by Cushman & Wakefield, commercial properties in India that are ‘REITable’ investment opportunities, are between $43 billion and $54 billion across the top cities.
Are REITs more attractive than actual property purchase?
Investing in REIT, can be compared to investing in gold bonds. Indians are partial to buying physical gold, rather than in gold bonds. Similarly, having one’s own property will always provide Indians with greater satisfaction, than mere paper investments. The Indian property market has almost stabilised. While it is human tendency to wait and watch, the bottom of the market cannot be fathomed accurately at the best of times. With the Union Budget 2017-18 clearly favouring first- time home buyers, 2017 may certainly be the year to make home ownership a reality.
(The writer is CMD, Amit Enterprises Housing Ltd)