New funding source

With the Securities and Exchange Board of India  (SEBI) approving  guidelines for  the launch and functioning of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InveITs), a new source of funding for two important sectors of the economy has been found.

They also open up a new channel of investment for retail and other investors as these trusts will be listed and traded on the stock exchanges like other securities. They were proposed by finance minister Arun Jaitley in this year’s Union Budget and the quick follow-up and clearance of the idea for implementation shows the importance attached to them. Such funds are available in developed markets and there is immense scope for their successful functioning in India where the real estate and infrastructure sectors will receive much attention in the coming years.  Both sectors are badly cash-starved. The real estate sector has large inventories of unsold finished projects and is weighed down by debt. REITs operate like mutual funds, invest in completed projects and pass on the rental income to investors in the form of dividends. There is scope for capital appreciation also. They allow investors to own a portion in property through the shares. Developers also benefit because they can sell finished projects to REITs and invest the income in new ventures. InvITs will help raise funds to meet infrastructure development needs which are estimated at about Rs 65 lakh crore in the next three years. Many projects which have been stalled because of lack of funds and cost overruns can be restarted with InvITs.  The two new instruments are said to have the potential to raise about Rs 1 lakh crore.  They can also reduce the pressure on the banking system which now finances the risky real estate and infrastructure sectors and faces the problem of large non-performing assets. 

While these are the perceived aims and advantages of the two instruments, it will take time for them to show results. Though the norms approved by the SEBI may come into force in a few weeks, retail investors may have to wait. The SEBI has also made some changes in the norms from what had been earlier proposed. But an element of risk is also seen in the investment because there will be wide fluctuations in rental and other incomes from REITs projects. There may be practical problems related to valuations of projects. But these are not forbidding if the ideas get going and get established.