BANGALORE:The Securities and Exchange Board of India (SEBI) is preparing to allow public and private sector companies to start Real Estate Investment Trust (REIT) to enable retail investors to invest in the real estate sector.
The minimum sum required for making investments in REIT, as per the proposed guidelines, is Rs 2 lakhs. At present, a minimum sum of upwards of Rs 20 lakhs is required for investing in the real estate sector. This means that only the upper-middle income segment can invest and benefit from the high returns that the sector provides. But REITs will open the gates for the middle income segment to also invest in the sector. But, this will also increase the responsibility upon the regulator to bring in transparency into the sector.
Anshuman Magazine, Chairman and Managing Director, CBRE, South Asia, says: “This is a welcome move. Once it is in place, it will provide an additional exit route for investors and enable retail money to be channelised into India’s realty sector through a regulated network. In the long term, the introduction of REITs will propel the sector, spurring capital inflows and bringing institutional credibility. The policy is likely to make more funds available for the real estate sector.”
Sachin Sandhir, Managing Director, RICS, South Asia, says that the decision to allow listings of REITs in India as an investment product will boost the liquidity situation of cash-starved developers, who are struggling to find funds for their construction activities. This would also help boost the subdued investor sentiments in the country. While REITs will provide investors an investment avenue, which is comparatively less risky, implementation will also give them easier exit routes along with regular income in terms of returns.
Sanjay Dutt, Executive Managing Director, Cushman & Wakefield, South Asia, says, “Allowing REITs in India has been a long-pending demand of the real estate sector. After five years of wait, the decision of SEBI to issue this consultation paper will revive substantial investor interest from domestic and global investors in India’s real estate markets, as it moves towards more organised and globally well-accepted practices of funding real estate development. Allowing REITs to operate in India would be a sign of maturity of the Indian real estate markets, as, globally, REITs are found in mature economies.
This is because it reduces individual speculation in real estate assets and allows more professional investment and management in the sector. Several developers and real estate funds eyeing Singapore for REITs may now look at doing REITs in India. Global investors who are risk or development-averse in Indian real estate markets may find ready leased assets with least risk and exits through REITs. Some of the real estate funds already invested in offices would certainly welcome the move.”
A strong culture of REIT, which will be managed by professionals, will bring in accountability and transparency into the real estate sector also. Sandhir says that REITs will go a long way in providing transparency and professionalism in the sector as there would be stringent compliance requirements for projects and developments through professional and fairvaluation practices and management of assets by professional firms.
According to the proposed guidelines, the fund will be listed on the stock exchange and investors can sell their units any time to exit from the fund. The proposed regulation has prescribed a minimum size of Rs 1,000 crores as corpus for the real estate fund. Out of this, 25 percent of the fund, or Rs 250 crores, has to be raised through a public offer. The listing of the fund has been made mandatory.
In line with the nature of the REIT to invest primarily in completed revenue-generating properties, it has been mandated in the proposed regulation that at least 90 percent of the value of the REIT assets should be in completed revenue-generating properties. In order to provide flexibility, it has been allowed to invest the remaining 10 percent in other assets as specified in the proposed regulations.
To ensure regular income to investors, a REIT is required to distribute at least 90 percent of its net distributable income after tax to the investors. The proposed guidelines said REIT should not invest in vacant land, agricultural land or mortgages other than mortgagebacked securities. Further, the REIT will only invest in assets based in India.
Welcoming the decision by SEBI, Bhairav Dalal, Associate Director, PwC India, said, “SEBI seems to have taken a very pragmatic approach about the REIT regulations. A lot of emphasis has been given to transparency and disclosures. Indian investors will get an additional investment opportunity to invest in real estate. It will also benefit real estate developers who will be able to transfer their developed assets into a REIT.”
Globally, a framework for REIT exists in several countries including the US, Australia, Singapore, Japan, France, and UK, among others. REITs are also a popular investment option for longterm pools of capital like pension funds and insurance companies, primarily since the regular stream of income helps them in managing regular outflow to their investors.
Sandhir says that if implemented, REIT will positively affect the commercial sector where large office buildings and parks can offer huge returns by way of REITs. Global investors who are risk or development-averse in the Indian real estate market may find ready leased properties as a better investment option and this would ensure that the much-needed institutional funding and liquidity would come into the real estate sector at the earliest.