REITS can have great in­vest­ment po­ten­tial

Though In­dia is yet to see the launch of its first REIT, in­tro­duc­ing this in­vest­ment ve­hi­cle can cre­ate a vi­brant mar­ket for com­mer­cial real es­tate

HT Estates - - HTESTATES - Gau­rav Karnik

Ra­jeev, aged 40 years, has a well set­tled job and a sta­ble in­vest­ment port­fo­lio com­pris­ing eq­uity shares and mu­tual funds. Apart from his rou­tine in­vest­ments, he has been able to ac­cu­mu­late an amount of ₹ 15lakh to ₹ 20 lakh which he wants to in­vest in a long-term as­set. He has lately been read­ing about de­mand from multi­na­tional cor­po­ra­tions (MNCs) for leas­ing com­mer­cial of­fice space and com­plexes. He wants to in­vest the money in com­mer­cial of­fice space so as to reap ben­e­fits of the in­creased de­mand of leas­ing com­mer­cial space from MNCs.

How­ever, a stand­alone bud­get of ₹ 15 lakh to ₹ 20 lakh is in­suf­fi­cient to buy such an as­set so Ra­jeev has no other op­tion but to con­tinue to put these funds in his ex­ist­ing port­fo­lio of eq­uity shares and mu­tual funds.

Many in­di­vid­u­als like Ra­jeev are fac­ing a sim­i­lar dilemma. To help them, se­cu­ri­ties mar­ket reg­u­la­tor, Se­cu­ri­ties and Ex­change Board of In­dia (SEBI)has come up with a nin­vest­ment ve­hi­cle called Real Es­tate In­vest­ment Trusts (REIT)

What are REITs?

SEBI no­ti­fied the REIT reg­u­la­tions in Septem­ber 2014. REITs are trust ve­hi­cles which can raise funds from in­vestors, ac­quire rent-yield­ing real es­tate, man­age such real es­tate and dis­trib­ute all of the in­come to in­vestors. The con­cept of REITs was first in­tro­duced in the 1960s in the United States and then in other de­vel­oped coun­tries like Sin­ga­pore, Ja­pan and Canada.

REITs are func­tion­ally sim­i­lar to mu­tual funds – they pool in the in­vest­ments of many in­di­vid­u­als and in­sti­tu­tions and then put in this money in real es­tate as­sets. Thus, REITs as an in­vest- ment class pro­vide the com­mon man an op­por­tu­nity to in­vest in fixed in­come se­cu­ri­ties which also pro­vide long-term cap­i­tal ap­pre­ci­a­tion and a nat­u­ral in­fla­tion hedge. It also opens to small in­vestors an arena, (rent-gen­er­at­ing real es­tate as­sets) hith­erto the mo­nop­oly of large in­vestors.

As com­pared to a con­ven­tional in­vest­ment in a real es­tate as­set, in­vest­ing in a REIT pro­vides an in­vestor much needed trans­parency and has­sle-free ac­cess to a port­fo­lio of as­sets, thereby en­sur­ing that an in­di­vid­ual does not be­come a vic­tim of foul play by some de­vel­op­ers. Some of the key reg­u­la­tions im­posed by SEBI which make REIT well-reg­u­lated and in­vest­ment-friendly are: Com­pul­sory dis­tri­bu­tion of 90% of net dis­tributable in­come earned by REIT to its in­vestors; Spe­cific norms in re­spect of port­fo­lio of as­sets which can be held by a REIT; such as at least 80% of the value of REIT to be in­vested in com­pleted and rent-gen­er­at­ing prop­er­ties Full and trans­par­ent dis­clo­sure of trans­ac­tions with re­lated par­ties Norms in re­spect of ap­point­ment and in­de­pen­dence of val­uer have also been put in place Au­dit of ac­counts of REIT to be done for not less than two times a year Well laid set of rights and re­spon­si­bil­i­ties of unit hold­ers, in­vest­ment man­ager, trus­tee and val­uer, etc.

Ben­e­fits of REIT

Although In­dia is yet to see the launch of its first REIT,the in­tro­duc­tion of REIT is ex­pected to cre­ate a vi­brant mar­ket for com­mer­cial real es­tate in In­dia. REIT has the po­ten­tial of of­fer­ing a per­fect in­vest­ment op­por­tu­nity to small in­vestors. It has democra­tised real es­tate in­vest­ment by giv­ing all in­vestors the abil­ity to in­vest in the real es­tate sec­tor and gain the same ben­e­fits. We have listed be­low some of the ben­e­fits of­fered by REITs: In­dian tax laws pro­vide for ben­e­fi­cial tax regime for REITs and its in­vestors, in line with the global stan­dards; En­sure reg­u­lar in­flow of in­come with cap­i­tal preser­va­tion and ap­pre­ci­a­tion; Of­fer a nat­u­ral hedge against in­fla­tion as com­mer­cial real es­tate rents and val­ues have a ten­dency to in­crease when prices in­crease. This has sup­ported REIT div­i­dend growth, pro­vid­ing re­tire­ment in­vestors with re­li­able in­come even dur­ing in­fla­tion­ary pe­ri­ods; Of­fer easy exit op­por­tu­nity and liq­uid­ity to in­vestors; Pro­vide de­vel­op­ers with an al­ter­nate source of rais­ing funds from pub­lic; In spite of the fact that In­dian markets have not seen prac­ti­cal ap­pli­ca­tion of the con­cept of REIT, still the­o­ret­i­cally, in­vest­ment in REITs is quite an easy and trans­par­ent process. SEBI reg­u­la­tions re­quire units of REITs to be listed on a recog­nised stock ex­change al­low­ing

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