REITs In Indian Real Estate: How Small Investors Can Make Big Money

After a long wait, real estate investment trusts (REITs) are likely to become a reality soon. REITs are expected to provide opportunities for retail investors, to participate in the real estate sector and at the same time, it will help the industry to get liquidity for projects. According to reports, the listing potential of the Indian REIT market, could easily cross the trillion-rupee mark.

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REITs are listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling buildings which have been completed, to the investors. REITs are likely to propel a new wave of market activity and with greater availability of funds, investment in the country’s real estate sector, it is hoped, will increase.

Why REITs are significant for the Indian realty market

Siddhart Goel, senior director – research services, India, Cushman & Wakefield says, “REITs will usher greater liquidity in the commercial sector, while giving developers an option to exit projects, including those developers who are reeling under a financial crunch. As of December 2016, Cushman & Wakefield Research projected the total value of ready REIT-eligible projects at USD 44-53 billion, across the top seven cities in India. Further, the enforcement of RERA and REITs, together will give rise to a more transparent, organised market. Over the last two years, the government has introduced various concessions and provisions to make REITs attractive.”

The enactment of RERA, is expected to make the fragmented, unorganised real estate market more transparent. This transparency will create a more favourable environment for investments, as REIT funds will prefer a regulated market.

Impact of the RBI’s proposal, to allow banks’ participation in REITs

Experts point out that the government has already abolished dividend distribution tax for SPVs and allowed foreign investors into REITs. In a recent move, the Reserve Bank of India (RBI) has proposed to allow banks to invest as much as 10% of their unit capital in REITs and InVITs. This will provide scope for greater institutional funding in a stable manner, thereby, improving liquidity among developers. These incentives are likely to make REITs more lucrative for institutional and retail investors.

“The RBI’s proposal, to allow banks to invest in REITs and participation up to 10%, will propel many companies to bring in their REITs and get it listed on the exchange. Banks will now have a safe asset class to invest in. Overall, this will infuse liquidity in the system and help the real estate sector,” maintains Aniel Kuumar Saha, CMD, Saha Groupe.

Issues that require attention, for the success of REITs

Nevertheless, Saha adds that several issues need to be addressed immediately, for the success of REITs:

“Correct methodology in valuation of assets – Managers assigned to evaluate the job, should be skilled enough.
Supply of Grade A office and commercial space should be maintained.”

While the government has cleared the decks for the success of REITs, the levy of stamp duty charges at the state level, remains a hindrance in the attractiveness of REITs, as it can reduce the returns and make this form of investment less attractive, compared to bonds and other asset classes, say realty experts.

“REITs will provide a good avenue for retail investors, to invest in income-generating commercial offices of smaller ticket sizes, which was rather difficult until now. The Indian market is waiting expectantly for the first REIT listing, which is expected to take place during the latter half of 2017”– Siddhart Goel, senior director – research services, India, Cushman & Wakefield.

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Amit Sethi

Amit Sethi is an accomplished professional with a distinguished background, holding an MBA in Finance. As an Independent Journalist and Data Provider with 20 years of invaluable experience, his expertise lies in meticulously covering stories on Real Estate, Personal Finance, Business and Banking. He writes journalistic content for leading media publications in India and also provides analytical data to real estate and fintech companies. Amit is driven by a purpose to disseminate insightful narratives, using verified information to empower individuals with financial literacy. Through his work, he aims to assist people in staying aware and making informed decisions that positively impact their financial well-being. Amit is a fitness freak, a marathoner and likes trekking.