As India makes a foray into a new investment model, its success will depend on an efficient regulatory system that can ensure best interests of all
One may not be aware but Real Estate Investment Trusts (REITs) sway our life consistently. From the place where we live, to where we work, REITs surround us. A great many people don’t have the time or resources to buy or manage large-scale income-producing real estate. But the good news is that REITs allow us to own a share of the kind of real estate that would have otherwise been financially out of reach. How? These are mutual funds-like institutions that enable individuals to purchase/sell REITs on open stock trades.
Benefits of investing in REITs: Global capital allocation towards REITs is increasing exponentially. In a major signoff, investors have started taking fancy to Indian real estate — the sector has garnered a whopping Rs 8,000 crore in the last fortnight alone. This comprises the Rs 3,200 crore QIP by DLF and the Blackstone-Embassy combine, raising Rs 4,750 crore in India’s first ever REIT offering. Private equity players have invested close to $53 billion since 2008 in India’s real estate story. For investors, the chance to own a share of valuable real estate has meant income as well as diversification for their investment portfolios.
To qualify as a REIT, an entity must have a bulk of its assets and income connected to real estate investments. It must also distribute at least 90 per cent of its taxable income as dividends to shareholders. As a result of these necessities, REITs give a one-of-a-kind mix of all-out return that sits among stocks and bonds. By comparison, equity returns have mainly come due to capital admiration. Fixed income returns have been more dependent on income or coupons. An extraordinary blend of development and required investor payouts that REITs give may be appealing to add up to return financial specialists with a pay centre. Alongside their extraordinary, income-oriented attributes, REITs may likewise help diversify a portfolio and lower the overall risk. In addition to strong historical performance, it is believed that going forward, opportunities for real estate investors will keep coming. The current REIT cycle has been a bit lengthy but long and persistent economic cycles are common in real estate. Given the nature, rising loan fees are worth considering. In these periods, REITs have really been extensively increasingly adaptable, completely beating fixed pay after some time.
Success of first REIT and impact on real estate: REITs in India are expected to provide people with an opportunity to invest in fixed income securities, which also provide long-term capital appreciation. Due to limited investment opportunities, savings made by such investors are usually channelised into gold and housing, which are unproductive assets. As an investment, REITs are expected to convert such capital into productive assets. Additionally, they open to little financial specialists a field (for example, lease creating land resources) that was until now the syndication of extensive financial specialists. Since REITs have to distribute 90 per cent of the income back to shareholders, the returns are higher than the stock market. It will help developers improve their debt-equity balance and assist in the growth of a more stable and mature market. REITs, being pure equity capital, will also provide developers with institutional capital to sell their assets and utilise funds for further development or paring of bank debt. With access to public markets for IPOs not being a short to medium term option for developers in India, this option is all the more attractive.
The real estate sector is strongly associated with infrastructure and is fundamental to its growth. Given its capital-intensive nature and the limited options available to developers as well as owners for raising funds, REITs offer a way forward. In general terms, a REIT is an investment vehicle that owns and operates real estate-related assets and allows investors to earn income produced through ownership of commercial real estate without actually having to buy an asset. Typically, the income-producing real estate assets possessed by a REIT incorporate office buildings, shopping malls, apartments, warehouses and mortgaged property. REITs were first introduced in the US in the early 1960s and have since been adopted as a preferred investment mode across the world. Over the years, they have constructively changed the way the real estate market operates, benefitting investors and developers.
Thus, the success of REITs in any country depends on its capability to customise rules and regulations governing REITs in such a way that they fit into individual markets. The support of governing authorities to ensure a less restrictive REIT regime and favourable tax transparency status is a critical factor in the development of a vibrant REIT sector in a new market. To conclude, India has the entire gradient to witness a successful REIT regime in the long-term. All that is required is an efficient regulatory system framed that can ensure the best interest of the investor, the market and economy, while also making the instrument attractive in terms of greater yield and less risk to entice domestic and foreign investors.
(The writer is Chairman of a real estate development firm)
