Real Es­tate In­vest­ment Trusts (REITs): Ben­e­fits & Chal­lenges


Accommodation Times - - .. Echoes.. - By Subhankar Mi­tra, Head - Strate­gic Con­sult­ing (West), JLL In­dia

A real es­tate in­vest­ment trust (REIT) is a com­pany that owns, and in most cases op­er­ates in­come- pro­duc­ing real es­tate. REITs own many types of commercial real es­tate, rang­ing from of­fice and apart­ment build­ings to ware­houses, hos­pi­tals, shop­ping malls, ho­tels and even tim­ber­lands. Some REITs also en­gage in fi­nanc­ing real es­tate.

The REIT sys­tem was de­signed to pro­vide a real es­tate in­vest­ment struc­ture sim­i­lar to the kind that mu­tual funds pro­vide for in­vest­ment in stocks. REITs can be pub­licly or pri­vately held, but only pub­lic REITs may be listed on pub­lic stock ex­changes. REITs can be clas­si­fied as eq­uity, mort­gage or a hy­brid.

REITs were cre­ated in the United States when Pres­i­dent Dwight D. Eisen­hower signed into law the REIT Act. REITs were cre­ated by the US Congress in to give all in­vestors the op­por­tu­nity to in­vest in large-scale, di­ver­si­fied portfolios of in­come­pro­duc­ing real es­tate in the same way they typ­i­cally in­vest in other as­set classes – through the pur­chase and sale of liq­uid se­cu­ri­ties.

Since then, more than 20 coun­tries around the world have es­tab­lished REIT regimes, with more coun­tries ac­tively con­sid­er­ing them. The spread of the REIT ap­proach to real es­tate in­vest­ment around the world has also in­creased aware­ness and ac­cep­tance of in­vest­ing in global real es­tate se­cu­ri­ties.

The Govern­ment of In­dia is still in the process of for­mu­lat­ing leg­is­la­tions for REITs in the In­dian real es­tate mar­ket. SEBI pub­lished its draft reg­u­la­tion in the last quar­ter of 2012. Once im­ple­mented, In­dian REITs will help in­di­vid­ual in­vestors reap the ben­e­fits of own­ing in­ter­est in the se­cu­ri­tised real es­tate mar­ket.

The great­est ben­e­fit will be that of fast and easy liq­ui­da­tion of in­vest­ments in the real es­tate mar­ket, in marked con­trast to the tra­di­tional man­ner of dis­pos­ing of real es­tate.

The govern­ment and Se­cu­ri­ties and Ex­change Board of In­dia, through var­i­ous no­ti­fi­ca­tions, is in the process of mak- ing it eas­ier to in­vest in real es­tate in In­dia di­rectly and in­di­rectly through for­eign di­rect in­vest­ment, via listed real es­tate com­pa­nies and mu­tual funds. · Ben­e­fits For In­dian

Real Es­tate REITs will en­able re­tail in­vestors to par­tic­i­pate in the real es­tate space with small in­vest­ment sizes. This will un­lock a new source of project fi­nanc­ing for real es­tate. As of now there is very lit­tle hold­ing power avail- able with the de­vel­op­ers. There­fore, there is lit­tle in­ter­est with them to cre­ate high-grade commercial, re­tail or any other in­come gen­er­at­ing as­sets.

Even large de­vel­op­ers strata sell commercial or re­tail projects to mul­ti­ple HNI in­vestors. Such a sit­u­a­tion cre­ates com­plex­ity in main­tain­ing and pro­mot­ing these spa­ces, apart from cre­at­ing ti­tle is­sues and many other com­pli­ca­tions. Once a REIT takes charge of a commercial property, the sce­nario im­proves sig­nif­i­cantly.

Smaller de­vel­op­ers will also be en­cour­aged to cre­ate leasehold as­sets, be­cause REITs will pro­vide them with ex­its and an in­cen­tive to de­velop high-grade build­ings. This would have a very pos­i­tive im­pact on the over­all real es­tate in­dus­try, since de­vel­op­ers who are cur­rently do­ing only res­i­den­tial projects would be able to di­ver­sify their portfolios and achieve a more bal­anced growth.

There would def­i­nitely be more mo­men­tum on the mar­ket, and var­i­ous new as­set classes hitherto con­sid­ered non-vi­able by many de­vel­op­ers would emerge in strength – for in­stance, stu­dent hous­ing, se­nior liv­ing projects and rental hous­ing schemes. Chal­lenges For REITs There are sev­eral chal­lenges to over­come be­fore the suc­cess­ful im­ple­men­ta­tion of REITs in In­dia. To be­gin with, ti­tle cer­ti­fi­ca­tion in In­dia is an am­bigu­ous and cum­ber­some process, and this com­plex­ity dis­cour­ages many po­ten­tial for­eign and do­mes­tic in­vestors from buy­ing into in­come-yield­ing prop­er­ties.

An­other is­sue is the val­u­a­tion mech­a­nism. Real es­tate val­u­a­tion in In­dia is largely un­reg­u­lated and lacks a stan­dard code of prac­tice or ethics. In or­der to im­ple­ment REITs, the govern­ment will have to ad­dress these is­sues via mak­ing and amend­ing mul­ti­ple leg­is­la­tures.

It is to be hoped that the new govern­ment will se­ri­ously look into the ur­ban de­vel­op­ment and fo­cus on the cre­ation of right kind of built in­fra­struc­ture that is the key for sus­tain­able growth.

REITs and the as­so­ci­ated changes in the leg­is­la­ture need to find a place on a pri­or­ity list that aims for larger de­vel­op­ments and sub­se­quent em­ploy­ment cre­ation.

Subhankar Mi­tra, Head - Strate­gic Con­sult ing (West), JLL In­dia

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