Now in­vest in REITS as you would in mu­tual funds

HT Estates - - HTESTATES -

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.


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