Now invest in REITS as you would in mutual funds
REITs have demonstrated the ability to attract and effectively manage investments in the real estate sector. REITs are vehicles which raise funds from investors, acquire rent yielding real estate and distribute the income to investors.
This format is successful in other jurisdictions such as US, Singapore, Australia, Japan etc. Besides other advantages, REITs bring greater transparency in the sector by adopting better corporate governance, disclosures and financial transparency practices.
With the introduction of REITs, it is expected that:
At the investor level, REITs offer the advantage of providing investors, specifically small and mid-size investors, opportunities to diversify their investment portfolio through participation in benefits from ownership of commercial real estate or mortgage lending, thus providing a long term stable source of income, protection from inflation and capital appreciation.
Due to lack of investment opportunities in the market, savings of such investors are often channelised i nto unproductive assets like gold and housing. A publicly traded REIT will convert such un-productive consumption into a productive asset class.
Further, similar to the US and other countries with developed REIT regulations, pass through status of the vehicle and reduction in transaction costs would also go a long way in increasing returns to investors due to the fact that leakage in returns on account of various tax costs at the REIT entity level would reduce.
There will be greater capital inflows from overseas markets. Comfort of investors through registered and regulated investment vehicles would encourage capital flows towards this sec- tor. These vehicles would then hold strategic investments in projects, thereby meeting the requirements of both the investor and the real estate developer, i.e. through enhanced and stable returns and equity funding respectively.
Another area where REITs score is that it will encourage corporate houses to remove property assets from their balance sheets and use the funds to repay banks thereby reducing the pressure on the Indian banking sector and also risk of potential non-performing assets.
A distinct advantage of introduction of REITs would be creation of the debt-equity balance in the sector which would result in reduction in circulation of capital in the form of debt. Demand for capital in the sector once met by equity financing would have a simultaneous effect on reducing the debt component and assist in the growth of a more stable and mature real estate market.
Introduction of a workable REIT regime will provide the much needed funds to the cash trapped real estate sector as it opens a new source of finance. However, i t is important to bring in clarity on taxation of REITs/ its investors and allow foreign investment in REITs as without these complimentary actions, REITs would really not take off in the manner intended.