The long pending REITs has finally arrived in India. Real Estate Investment Trusts or REITs, a concept quite old in developed countries, has been introduced by the new government, providing an alternative investment opportunity for investors. Both retail as well as high net-worth individuals can participate in this investment opportunity which is considered by many as the game-changer for the realty sector and also which might bring in some stability on seeking inflation-beating returns with a not-so-risky approach. The equity market regulator SEBI has finalised the norms for the same which is expected to be officially launched very soon for investors to participate.
REITs are those that invest in income-earning realty assets such as commercial complexes, residential houses, and apartments that offer long-term growth as well as generate rental income. Their structure would be similar to that of mutual funds wherein there will be a sponsor, trustee and an asset management company (asset managers).
As per the SEBI guidelines it has mandated that at least 90 per cent of the value of the REIT assets shall be in completed revenue generating realty projects. The balance can be invested in under-construction property, mortgage-backed securities, listed or unlisted debt securities, govt. securities and money market instruments.
For investors, REITs offer yet another regulatory backed organised investment instrument after debt, equity, commodity and currency. Since investing in real estate needs a whole lot of money, small amounts are mobilised on the lines of Collective Investment Scheme from those who have a common objective and invest in real estate opportunities in an endeavour to generate returns; and further, the proceeds from such investments by way of profits generated would be distributed to investors (unit holders).
Interestingly, Singapore has 26 stock exchange-listed REIT firms that represent a diverse range of property investments such as residential, office, retail, industrial and hospitality opportunities that has seen immense success since launch in the year 2002.
In India too the REITs have to launch an Initial Public Offer and subsequently list themselves on recognised stock exchanges providing easy liquidity to investors. The minimum investment has been pegged at Rs.2 lakh, making it an almost retail product. This amount may seem to be high, but considering the cost of real estate (unlike debt, equity or commodity) whose prices are very high even for average purchase the upfront investment amount seems justified.
Tax front On the tax treatment front, the norms may not be favouring the sponsors, but they seem to favour the investors where the long-term capital gains are supposed to be made tax free just like stocks if the same is sold on a recognised stock exchange. The investors too could get a good chance of getting regular payouts since SEBI has said that 90 per cent of the distributable income should be paid out to unit holders at least once in six months.
Introduction of REITs may be a shot in the arm for providing the much needed liquidity to the real estate sector which is cash strapped as well as reeling under high cost loans. It is expected to bring copious amount of money in the coming days. But we should also keep in mind that in India this sector is the most corrupt and unorganised with a lot of unaccounted money flowing across various types of property transactions. Unless the law curbs this menace this concept may turn out to be a damp squib.
Nevertheless, since the companies that propose such opportunities would have to do a lot of disclosures and be transparent in their dealings one can expect some positive changes that would ultimately benefit the investors.
Investors should wait for more news on this front on the modalities and also more clarity on tax treatment. The rest of the year looks exciting once the launch happens because the bigwigs of the corporate world are queuing up to explore this goldmine of an opportunity.
