Backed by strong economic fundamentals, financial reforms and rising per capita income, Indian real estate markets have witnessed amazing growth rate of plus 30% in the past four years. However, investing in real estate still remains cumbersome and risky for a retail investor. The advent of REITs in India is set to change the picture both for the investor and the industry players, who will then be able to access organised financing through this internationally-acclaimed investment vehicle. Brix Research tracks the global trends that may serve as India’s benchmark. Basically there are three types of REITs; Equity REITs, Mortgage REITs, Hybrid REITs.
Advantages of REITs
Real estate is an all-time favourite investment vehicle across the world. However, being an unorganized industry, constraints like speculative pricing, insecure mode of transaction, cumbersome legal processes, and tax burden make real estate investment a no-no for the common man. REITs with its bouquet of advantages come up as a potential alternative.
” Secured Investment: Since REITs are formed and managed by professionals, the retail investor is in a position to leverage their industry knowledge and skills. Besides, the investor does not need to take the pain of searching for the right property and then executing the transaction. You just need to buy units from REITs and invest your money in their portfolio.
” Stable Returns: As against equity-based financial products, investment in REITs brings stable and regular returns. Real estate rentals don’t fall the way stock markets do. This way you can expect an impressive rate of return on your investment, which are better than government securities and debt instruments.
” Diversification: If you invest in a particular property, you have to put a whole lot of money in it, and chances are, your bet does not bring expected returns or even undergo capital loss. REITs, on the other hand, may invest your money in different types of properties located across the country. This way, they spread the risk around different properties.
” Easy Liquidation: You can sell a property in a day but sometimes it takes several months to arrive at a deal, and things get worse in case you need to liquidate your investment in order to meet exigencies. However, in case of REITs, you can always redeem your unit holdings, which are generally listed on stock exchanges.
” Tax Sops: You don’t need to pay property tax, municipal and other related charges while investing in a REIT. In fact, you may be given tax exemptions by the government, as in most parts of the world.
REITs in India
India is looking forward to the introduction of REITs laws. Of late, the SEBI has issued a draft for REITs regulations that is expected to come into effect soon. Meanwhile, the regulator has clarified that any trust, banking, insurance or financial institution or body corporate with minimum net worth of Rs 5 crore can form a REITs. In order to protect investor interest, no REIT will expose more than 15 per cent of its corpus to a single project or more than 25 per cent of all real estate projects developed, marketed, owned or financed by a group of companies. The REITs are also prohibited from investing in vacant land or engaging in property development activities. To further safeguard investor interests, the regulator also intends to empanel independent agencies that will rate REITs schemes, which may remain close-ended for the period of three years but could be sold on stock exchanges. Industry captains, at the other end, are looking for waiver on capital gains tax on sale of assets by REITs. According to Associated Chambers of Commerce and Industry of India (ASSOCHAM), if REITs are to become a success in India, the stamp duty paid by such trusts should be allowed to be converted into value added tax. Meanwhile, it has been observed that tax breaks play a major role in driving REITs worldwide. A reform-oriented legal framework, investor-friendly approach and comprehensive tax policy is what can position REITs as a potential instrument of finance and investment in India.
Source: Indian Real Estate (Vol-I)
indianrealestate@brixresearch.com
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