In India, Real Estate have had been reeling under immense financial pressure, as market have lesser buyers and properties are piling up for sale.
With slowdown, market has been stagnant ever since, which led to slower growth in construction and other allied industries.
The new incoming government has been quick to respond to tackle this situation by instantly introducing REITs in India.
REIT – real estate investment trust – will enable small to large players to invest or exit in real estate properties.
Now, for the layman REITs is still confusing concept.
This quick guide to REITs will explain in detail about it in context of India.
What is REITs?
In a single line – REITs are trust that operates and manages income producing real estate portfolio (esp. commercial properties such as shopping malls, office spaces, hotels, resorts, warehouses etc.).
Basically there are three types of REITs – Mortgage, Equity and Hybrid REITs that can be incorporated by private, publicly traded or Non-exchanged traded trusts.
Mortgage REITs – These REITs generally provides loan for mortgages to property owners, buys mortgages and securities. Their prime source of income is interests from mortgages.
Equity REITs – Directly buys properties or lands in order to generate income from rents.
Hybrid REITs – These types of REIT are combination of both mortgage and equity REITs.
In India, Hybrid REITs incorporated by private or publicly traded allowed under the newly introduced formed REITs act by SEBI.
Why Real Estate Industry of India needs REITs?
In 2008, SEBI formed draft on REIT but due to global economic slowdown, it was postponed. Now with new investor friendly government, market has revived and even SEBI regulatory was on toes to launch REIT.
Now, REIT is here but why real estate industry of India needed it?
Since 2008, real estate industry has gradually slowed down across world, especially in India. In India, we have witnessed booming growth but it has not returned after 2008 economic slowdown.
Moreover, allied industries are affected, and even market and regulatory barriers has only increased over the years.
All these factors have aggravated situation to superficial financial crunch in the market as properties have piled up against lesser buyers in the market for both commercial and residential.
With coming of REITs, market can loosen up a bit, and capital will increase for large developers.
By forming REITs, developers can exit out from their commercial properties, and again boost their construction activities across India.
Though, market has recovered and sustained but trigger was pending to boom it again. Also, streamlining of regulatory policies are need of the hour. Introduction of REITs in India is the first step.
REITs in India
SEBI has formed guidelines to launch in REITs in India that are somewhat similar to US’s REITs regulation.
Firstly to launch REIT, you will need to have at least INR 500 crore asset portfolio. For publicly traded REIT, you will need to introduce at least 250 crore initial public offering with 25% public float.
Secondly, you will have to invest in at least two real estate projects. The investment in one project should not be more than 60% of value of total assets. You cannot invest more than 10% in under construction real estate.
Thirdly, you’ll have to distribute 90% of profits collected annually as dividends to investors. Foreign investors are allowed to invest at IPO and later stages only. Insurance companies, pension and provident funds are allowed to invest in REITs.
Lastly, for investors to buy stocks in your REIT they will need to invest at least two lakh rupees.
Benefits REITs Offer
REITs offer benefit to both developers and investors. For developers can use REITs as an exit option from commercial properties to generate liquidity.
To investors REITs will offer an opportunity to invest, which previously limited to individuals that have high liquidity. Also, it allow people to bypass regulatory barriers that are present in buying directly.
The most importantly, REITs will help Indian economy and real estate industry to generate capital, which will again trigger boom in market and allied industries especially construction.
Where REITs will invest?
That’s prime question. Generally, REITs invest in commercial and income-generating properties and portfolios to generate incomes from rents and/or interests.
There are REITs in other countries that invest in residential or have specialization in residential property investment. However, in India investments in residential are unlikely to happen because in residential portfolios, income generation opportunities are either low or average rents are lesser in comparison to commercial properties.
Future of REITs in India
Future looks bright for REITs in India but still there are questions that are left unanswered, few of them are –
1. Around the world, REITs offer multiple tax exemptions. So, will it be offered in India too? Corporate has made it clear that without tax exemptions REITs will be unviable option in India.
2. There are question marks on the structure and again on taxation at income and capital gains level.
3. Who will jump first to launch REITs in India? There’s a hot speculation that small players that are in need of capital will be the first. But the large developers may be the late movers as they will be closely scrutinize and wait till the structures, regulatory and taxation policies are clear.
The bottom line is, REITs are positive step forward, but SEBI and other concerned regulatories will need to put in greater efforts to listen to demands of developers, and bring clarity to the proposition.