REIT in India: a boon or bane?

Trust is a critical element in any of kind of business transaction irrespective of the legal framework. Leveraging this ‘trust’ value, the real estate sector has introduced Real Estate Investment Trusts (REIT), which is set to drive the standing of India’s real estate even higher.

REIT is an instrument, which has the potential to change India’s real estate sector as an investment avenue. REITs were introduced at the right time as real estate is opening up with many initiatives launched to streamline the sector.

The challenges of real estate sector are well documented like the presence of organised and unorganised players, the complexity of regulations, transactional issues, lack of desired level of transparency and accountability etc, all of which are now being addressed from the long-term perspective.

The objective of REITs is to cut through this maze and present a more transparent picture. The government first talked about the introduction of REITs way in 2014 and there has been progressing in terms of laying down the guidelines.

However, one needs to understand the fundamental premise of a REIT. The model and functioning are very similar to a mutual fund, where an individual or group gets the opportunity to participate in an asset class through the buying of units.

The real estate industry could never attract retail investors into the sector as active investors due to a variety of reasons but today REITs provide the opportunity.

• Income through dividends: Under the guidelines framed by Securities and Exchange Board of India (SEBI), REITs will have to distribute 90% of income generated twice a year.

• Transparency: This is the biggest benefit through REITs as the trustees of such instruments cannot hide any critical information and this will naturally attract a greater number of investors.

• Lower risk: The regulations state that REITs have to put 80% of the money into income earning assets such as its commercial spaces, offices, or rental accommodations. The rest can be into upcoming projects. This lowers risk for any investor.

• Diversification: REITs will have to invest money into at least two projects with up to 60% into a single one. This actually brings the element of spreading the risk.

• Owning asset class: REITs allows an investor to be a part owner of a commercial real estate besides getting professional guidance from the property managers.

To ensure that REITs have a strong resonance with the investor class, regulations stipulate that it has a three-tier structure comprising the sponsor who is responsible for setting up the REIT, a fund management company, which is responsible for selecting and operating the properties and lastly the trustees, who ensure that the money is managed in the interest of investors.

The SEBI requires REITs to be listed on exchanges and to make an initial public offer to raise money. A recent report by Cushman & Wakefield, said commercial properties that are ‘REITable’ investment opportunities is between $43 billion and $54 billion across top cities.

The returns of REITs may not be very high like what one would expect from the stock markets, but indications are that it would be somewhere in the range of 7-8%. In case, there is a higher premium on the property, the return may go up to 14-15%. This ensures that there is a steady return.

Enthusing investors

In the US, for example, REITs have been in existence for several decades and the returns are in the range of 4% to 8%. In instruments such as infrastructure investment trusts (InvITs) have not really enthused investors, as these assets are owned by the government. The REITs can change the game as there are the private professional players.

In real estate sector, both rent and capital appreciation from property depend on the location, infrastructure and industrial development around that area. The REITs juggle these risks through a diversified portfolio of properties.

The REITs can play a critical role in the systematic growth of the sector. The sector is now slowly recovering from a slowdown but it is still facing a liquidity crunch.

The REITs can help cash-strapped developers to monetise their existing property. It also gives an opportunity for investors to diversify their portfolio beyond gold and equity markets.

The beginning might be slow for REITs and it has been probably delayed for a long time, but there is never a question of timing for a good thing.

(The writer is Managing Director, Salarpuria Sattva Group)