REITS: Challenges for the new government
May 08, 2014
Source : The Times of India

 

MUMBAI: Although REITs is not a new name in India, the government is still in the process of formulating legislations for it in the Indian real estate market. Indeed, implementing REITs is one of the challenges that the new government faces.

A real estate investment trust (REIT) is a company that owns, and in most cases operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping malls, hotels and even timberlands. Some REITs also engage in financing real estate.

The REIT system was designed to provide a real estate investment structure similar to the kind that mutual funds provide for investment in stocks. REITs can be publicly or privately held, but only public REITs may be listed on public stock exchanges. REITs can be classified as equity, mortgage or a hybrid.

REITs were created in the United States when President Dwight D. Eisenhower signed into law the REIT Act. REITs were created by the US Congress in to give all investors the opportunity to invest in large-scale, diversified portfolios of income-producing real estate in the same way they typically invest in other asset classes – through the purchase and sale of liquid securities.

Since then, more than 20 countries around the world have established REIT regimes, with more countries actively considering them. The spread of the REIT approach to real estate investment around the world has also increased awareness and acceptance of investing in global real estate securities.

The Government of India is still in the process of formulating legislations for REITs in the Indian real estate market. SEBI published its draft regulation in the last quarter of 2012. Once implemented, Indian REITs will help individual investors reap the benefits of owning interest in the securitised real estate market.

The greatest benefit will be that of fast and easy liquidation of investments in the real estate market, in marked contrast to the traditional manner of disposing of real estate. The government and Securities and Exchange Board of India, through various notifications, is in the process of making it easier to invest in real estate in India directly and indirectly through foreign direct investment, via listed real estate companies and mutual funds.

Benefits for Indian real estate

REITs will enable retail investors to participate in the real estate space with small investment sizes. This will unlock a new source of project financing for real estate. As of now there is very little holding power available with the developers. Therefore, there is little interest with them to create high-grade commercial, retail or any other income generating assets.

Even large developers strata sell commercial or retail projects to multiple HNI investors. Such a situation creates complexity in maintaining and promoting these spaces, apart from creating title issues and many other complications. Once a REIT takes charge of a commercial property, the scenario improves significantly.

Smaller developers will also be encouraged to create lease-hold assets, because REITs will provide them with exits and an incentive to develop high-grade buildings. This would have a very positive impact on the overall real estate industry, since developers who are currently doing only residential projects would be able to diversify their portfolios and achieve a more balanced growth.

There would definitely be more momentum on the market, and various new asset classes hitherto considered non-viable by many developers would emerge in strength – for instance, student housing, senior living projects and rental housing schemes.

Challenges for REITs

There are several challenges to overcome before the successful implementation of REITs in India. To begin with, title certification in India is an ambiguous and cumbersome process, and this complexity discourages many potential foreign and domestic investors from buying into income-yielding properties.

Another issue is the valuation mechanism. Real estate valuation in India is largely unregulated and lacks a standard code of practice or ethics. In order to implement REITs, the government will have to address these issues via making and amending multiple legislatures.

It is to be hoped that the new government will seriously look into the urban development and focus on the creation of right kind of built infrastructure that is the key for sustainable growth. REITs and the associated changes in the legislature need to find a place on a priority list that aims for larger developments and subsequent employment creation.

 

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