MUMBAI: The concept of REIT is an attempt to infuse the characteristic of “Equity and/or Unit” in the real estate sector. This concept, though prevalent in foreign countries, is new for India and is yet to take off. Savings and investments of general public are pooled as equity/unit for ultimate investment in real estate entity. The units are listed. Thus, entry and exit options are always open to investors.
Though the real estate sector is increasing by leaps and bounds in India, but a tradable investment option in this sector is not available here. While mutual funds invest their corpus in equity, debt and money markets, REITs will invest primarily in real estate and that too mostly in completed, revenue-generating real estate. The rental received from these properties will be distributed among investors as dividend.
Securities and Exchange Board of India (SEBI) had taken the initiative in the year 2008 to allow REITs but had to back track as there was no regulator in the real estate sector with abundant anomaly in valuation of properties which is the actual platform where funds of REITs is invested. SEBI revived its earlier attempt and on October 10, 2013 has issued a consultation paper on draft Real Estate Investment Trusts (REITs) Regulations, 2013. Feedback from the public is awaited and once it is received the regulator will come out with the final regulations. It is expected that finally the operation of REITs in India may soon become a reality.
In the draft regulation, SEBI has proposed that the properties be adequately valued, subject to at least yearly physical inspection and valuations to be updated every six months and accordingly “NAV (Net Asset Value) of the REIT units will be declared at least six monthly. Implementation of these proposals will ensure that the assets of the REIT are properly and accurately valued. A REIT will have trustees, sponsors, managers and a principal valuer. A trust, once formed, will initially apply to SEBI for registration and after registration it will be allowed to offer units to the public and get the units listed.
After listing it may subsequently raise funds through follow-on offers. Listing of units will be mandatory for all REITs. For floating an initial offer of REIT units, the size of assets under REIT will have to be at least Rs 1,000 crore. This would ensure that initially only large assets and established entities enter the market. Further, the minimum initial offer size has to be Rs 250 crore, in which the public float has to be at least 25 per cent.
Advantages of investment in REITs
Lower entry level: SEBI has proposed a minimum unit size of Rs 1 lakh and minimum subscription size of Rs 2 lakh. In future it can be lowered further to make the participation more broad based.
Lower risk: Since investment of REIT corpus will primarily be in built-up property, it will eliminate the risks inherent to construction.
Easy liquidity: Since the units will be listed on stock exchanges there will always be an exit route for the willing investor.
Greater transparency: Presently, lot of black money is in circulation in the construction industry, but investment through REIT will be of white money only. This will bring more transparency to the real estate sector and make it more investor friendly.
Professional management: REITs will have professional managers to run the show. They will manage the realty portfolio judiciously and earn higher return for investors.