MUMBAI: REIT or Real Estate Investment Trust is a pooled investment instrument, like a mutual fund. While mutual funds invest primarily in debt, equity and money markets, REITs invest in real estate projects which are usually completed and are commercial in nature. The market regulator, Securities and Exchange Board of India (SEBI) has recently issued a consultation paper on the draft regulations for REITs. The instrument that is popular in several global capital markets may soon start operating in India as well. This is a much awaited move that is likely to be beneficial for real estate developers and investors alike.
REITs are going to prove to be a boon for the real estate sector in India that is suffering from a liquidity crunch and poor sales. They will allow developers in the commercial real estate space to unlock the value of their assets. Several real estate developers are at present faced with liquidity issues as they have large amounts of capital locked in commercial assets and are finding it difficult to sell these due to the large ticket sizes. REITs will ease this hassle. The move is also likely to bring in more regulation and globally-accepted real estate practices into the sector thereby reviving the interest of both domestic and foreign players in this space. There is likely to be more professional management of finances and investment in real estate of the country once REITs are introduced. REITs will also reduce the risk exposure of banks that have invested large amounts of capital in under-construction commercial projects.
There are several other proposals in the paper by SEBI which will all work towards ensuring more formalisation and clarity in the way the investment process in the sector works. For instance, it will be made mandatory for a REIT to have trustees, sponsors, managers and a principal valuer. The trust will have to apply for a registration with SEBI and once the market regulator grants the approval, only then will the trust be able to offer units to the public and get the units listed.To ensure that the investment is as safe as possible for investors, a REIT will be permitted to invest its entire corpus in one project only if the size of the asset is at least Rs.1,000 crore. The net asset value (NAV) of properties in which these instruments will invest will be examined twice a year by two independent valuations as per the consultative paper. This will ensure greater transparency and uniform valuation in this sector, enhancing the trust of potential buyers and investors.
The introduction of REITs will also provide a boost to the subdued investor sentiment in the economy. REITs enable investors to take advantage of appreciation of real estate without the hassle of buying and maintaining physical properties themselves. Investors are likely to take very favourably to REITs as these will also allow them to diversify their portfolio in a way that very few other options can. The low entry barrier, with a minimum unit size of Rs 1 lakh and minimum subscription size of Rs 2 lakh will be one of the main factors motivating investors. As per the proposal, initially only wealthy individuals and institutions will be allowed to subscribe to REIT unit offers but this benchmark is expected to be lowered gradually allowing retail investors to participate as well.
Many investors, who lack deep pockets, often do not have the ability to partake in asset allocation and balance their investments across asset classes in the realty segment. The introduction of REITs will allow them to do so. Another advantage that REITs will offer is that of mitigated risks as these instruments will primarily invest in completed projects. Thus, the risk associated with completion of under-construction projects that an investor in real estate is most often exposed to, gets reduced by a huge margin.
Another factor making REITs attractive to investors is the return on investments that unit holders will receive. The returns will be derived mainly from rental income or capital gains from real estate. The SEBI chief UK Sinha has also emphasised that he will ensure that these instruments are made tax-effiecient, offering another added benefit to the investment sentiment of the country.
All the above factors will make the entry of REITs into the capital market an advantageous move for both investors and the real estate sector. Investors will profit from the unique benefits that these instruments offer in terms of deriving value from appreciation of real estate and a diversified portfolio. The real estate sector will be given a boost in terms of capital inflows and a renewed investor confidence.