Dummy’s guide to Real Estate Investment Trusts or REITs
The announcement of real estate investment trusts (REITs) on modified version in the Budget 2014-15 spells good news for the developers and buyers. REITs can provide respite for the real estate industry by providing liquidity and the instrument model will prove to be a win-win model for developers and buyers.
The push from Securities and Exchange Board of India (SEBI) by releasing a discussion paper on REITs has played a critical role in this. SEBI Chairman sought tax exemptions on REITs with the Central government.
What are REITs?
REITs are to real estate what mutual funds are to equities and bonds. A Real Estate Investment Trust (REIT) is a trust that offers financial units to the public. They are financial instruments which buy, sell and manage real estate assets on behalf of the investors thus providing a hassle free and a convenient way to invest in the real estate market as well as diversification benefits with low liquidity risk. REITs are publicly traded like common stocks on various exchanges.
Below is a typical REIT structure:
Features of REIT
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• REITs have to be close ended schemes and can only invest in income generating real estate properties, prohibiting investments in vacant land
• Rated by a credit rating agency and shall not invest more than 15 per cent in a single real estate project
• Allow the customer to invest smaller amount of the savings into real estate which otherwise would not have been possible
• REITs prevent creation of black money as all transactions would take place through normal banking channels
• REITs typically own and manage income producing properties and are required to distribute about 90 per cent of the profits earned as dividend to unit-holders
REITs get a thumbs up from developers
What is in it for buyers?
Buyers are likely to benefit in three ways. First, the developer who will receive funding from a REIT will have to complete the project on time, so the buyer will get the delivery on time. Second, smooth and professionalized funding to projects may rationalize the prices of projects. Third, buyers will not face a scenario where a fly-by-night developer swindles them of their hard-earned money.
Buyers are going through a period of higher interest rate of loan and not getting any solution for low cost houses. REIT will help developers raise funds on nominal rates and this will directly affect cost of houses that will come down in coming days for future buyers, points out Dinesh Jain, CMD, Exotica Housing.
REITs would go a long way in providing transparency and professionalism in the sector as there would be stringent compliance requirements for projects, says Sachin Sandhir, MD, RICS South Asia. Global investors who are at risk or are development averse in Indian real estate market may find ready leased properties as a better investment option and this would ensure that much-needed institutional funding and liquidity would come into the real estate sector.
Where REITs have been a success
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by Neha Pathania Kashyap for 99acres.com
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