What REITs (Real Estate Investment Trusts) Mean For Indian Real Estate
- Kishor Pate, CMD - Amit Enterprises Housing Ltd.
The real estate sector in India has been lucrative for savvy investors over the last decade, but it has not been without accompanying uncertainties. The introduction of REITs (Real Estate Investment Trusts) will open up a platform that will allow all kinds of investors – even those with smaller budgets - to make safe and rewarding investments into the Indian real estate market. The best thing about REIT is that investors can start with as small a sum as Rs. 2 lakh to secure units in exchange.
The REIT platform has already been approved by the Securities and Exchange Board of India (SEBI) and like mutual funds, it will pool the money from all investors across the country. The money collected from the REIT funds will subsequently be invested in commercial properties to generate income.
A REIT will need to be registered via an IPO or initial public offering. REIT units, as such, will have to get listed with exchanges and consequently traded as securities. The SEBI board has kept the minimum asset sizes to be invested in at Rs. 500 crore. However, the minimum issue size would have to be less than Rs. 250 crore. As with stocks, the investors here would be able to buy the units from either primary and/or the secondary markets.
How does a REIT work?
REIT is a process to generate funds from a lot of investors to directly invest in profitable real estate properties like offices, residential units, hotels, shopping centers, warehouses and more. All trusts with REIT will be listed with stock exchanges as they would be structured like trusts. Consequently, REIT assets will be held with independent trustees for unit holders / investors.
Role of the trustees
Trustees with REIT have defined duties which typically involve ensuring compliance and adherence to all applicable laws that protect the rights of the investors.
The objective of REITs
A REIT’s objective is to provide the investors with dividends that are generated from the capital gains accruing from the sale of the commercial assets. The trust distributes 90% of the income among its investors via dividends. Apart from minimum entry level, a REIT is supposed to provide diversified and safe investment opportunities with reduced risks, and under a professional management to ensure the maximum return on investments.
The advantages with REITs include:
•Income dividends: 90% of distributable cash at least twice in a year
•Transparency: REIT will showcase the full valuation on a yearly basis and will also update it on a half-yearly basis
•Diversification: According to the guidelines, REITs will have to invest in a minimum of two projects with 60% asset value in a single project
•Lower risk: At least 80% of the assets will have to be invested into revenue-generating and completed projects. The remaining 20% of the properties that include properties like under construction projects, equity shares of the listed properties, mortgage- based securities, equity shares that derive a minimum of 75% of income from Government securities or G-secs, money market instruments, cash equivalents and real estate activities.
The REIT concept has been in the news for some time now. However, the real estate regulations rolled out so far have not quite helped bring them to Ground Zero in India as yet. REITs’ exemption from tax on the distribution of dividends would make it much more attractive for investors. According to a recent report by Cushman & Wakefield, commercial properties in India that are ‘REITable’ investment opportunities are between $43 billion and $54 billion across the top cities.
Are REITs more attractive than actual property purchase?
Investing in REIT can be compared to investing in Gold Bonds. Indians are partial to buying physical gold rather than in Gold Bonds, implying that having one’s own investment in property will always provide Indians greater satisfaction than mere paper investments. The Indian property market is now almost stabilized and it is the right time to buy self-owned homes. While it is human tendency to wait and watch, the bottom of the market cannot be fathomed accurately at the best of times.
At the end of the day, REITs are investment instruments and not a means to acquire actual property – which is always high on every Indian’s wish-list. A budget that clearly favours purchase decisions for first- time home buyers and is a step closer to the Prime Minister’s mission to provide Housing for all by 2022 is in place. 2017 is certainly the year to make home ownership a reality.
About The Author
Kishor Pate, Chairman & Managing Director of Amit Enterprises Housing Ltd. is the driving force behind one of the most successful real estate development firms in Pune and beyond. Apart from its signature luxury projects like Montecito in Sahakar Nagar and other premium gated townships, AEHL has also launched highly successful affordable housing projects like Astonia Classic and Colori in Undri and the Mediterranean-style township Astonia Royale in Ambegaon.
- Kishor Pate, CMD - Amit Enterprises Housing Ltd.
The real estate sector in India has been lucrative for savvy investors over the last decade, but it has not been without accompanying uncertainties. The introduction of REITs (Real Estate Investment Trusts) will open up a platform that will allow all kinds of investors – even those with smaller budgets - to make safe and rewarding investments into the Indian real estate market. The best thing about REIT is that investors can start with as small a sum as Rs. 2 lakh to secure units in exchange.
The REIT platform has already been approved by the Securities and Exchange Board of India (SEBI) and like mutual funds, it will pool the money from all investors across the country. The money collected from the REIT funds will subsequently be invested in commercial properties to generate income.
A REIT will need to be registered via an IPO or initial public offering. REIT units, as such, will have to get listed with exchanges and consequently traded as securities. The SEBI board has kept the minimum asset sizes to be invested in at Rs. 500 crore. However, the minimum issue size would have to be less than Rs. 250 crore. As with stocks, the investors here would be able to buy the units from either primary and/or the secondary markets.
How does a REIT work?
REIT is a process to generate funds from a lot of investors to directly invest in profitable real estate properties like offices, residential units, hotels, shopping centers, warehouses and more. All trusts with REIT will be listed with stock exchanges as they would be structured like trusts. Consequently, REIT assets will be held with independent trustees for unit holders / investors.
Role of the trustees
Trustees with REIT have defined duties which typically involve ensuring compliance and adherence to all applicable laws that protect the rights of the investors.
The objective of REITs
A REIT’s objective is to provide the investors with dividends that are generated from the capital gains accruing from the sale of the commercial assets. The trust distributes 90% of the income among its investors via dividends. Apart from minimum entry level, a REIT is supposed to provide diversified and safe investment opportunities with reduced risks, and under a professional management to ensure the maximum return on investments.
The advantages with REITs include:
•Income dividends: 90% of distributable cash at least twice in a year
•Transparency: REIT will showcase the full valuation on a yearly basis and will also update it on a half-yearly basis
•Diversification: According to the guidelines, REITs will have to invest in a minimum of two projects with 60% asset value in a single project
•Lower risk: At least 80% of the assets will have to be invested into revenue-generating and completed projects. The remaining 20% of the properties that include properties like under construction projects, equity shares of the listed properties, mortgage- based securities, equity shares that derive a minimum of 75% of income from Government securities or G-secs, money market instruments, cash equivalents and real estate activities.
The REIT concept has been in the news for some time now. However, the real estate regulations rolled out so far have not quite helped bring them to Ground Zero in India as yet. REITs’ exemption from tax on the distribution of dividends would make it much more attractive for investors. According to a recent report by Cushman & Wakefield, commercial properties in India that are ‘REITable’ investment opportunities are between $43 billion and $54 billion across the top cities.
Are REITs more attractive than actual property purchase?
Investing in REIT can be compared to investing in Gold Bonds. Indians are partial to buying physical gold rather than in Gold Bonds, implying that having one’s own investment in property will always provide Indians greater satisfaction than mere paper investments. The Indian property market is now almost stabilized and it is the right time to buy self-owned homes. While it is human tendency to wait and watch, the bottom of the market cannot be fathomed accurately at the best of times.
At the end of the day, REITs are investment instruments and not a means to acquire actual property – which is always high on every Indian’s wish-list. A budget that clearly favours purchase decisions for first- time home buyers and is a step closer to the Prime Minister’s mission to provide Housing for all by 2022 is in place. 2017 is certainly the year to make home ownership a reality.
About The Author
Kishor Pate, Chairman & Managing Director of Amit Enterprises Housing Ltd. is the driving force behind one of the most successful real estate development firms in Pune and beyond. Apart from its signature luxury projects like Montecito in Sahakar Nagar and other premium gated townships, AEHL has also launched highly successful affordable housing projects like Astonia Classic and Colori in Undri and the Mediterranean-style township Astonia Royale in Ambegaon.