The concept of REIT which is an acronym for Real Estate Investment Trust has been there for nearly 60 years now REITs. REITs as an investment asset class came into being when President Eisenhower of the USA enacted a law in 1960 that enabled all investors to invest in diversified large-scale portfolios of real estate that produce income in form of rent and lease. The first REIT was launched in 1961 by American Realty Trust 1961. In 2018, globally REITs had over 2 trillion US Dollars worth of assets under management. In the budget of 2014, Finance Minister Arun Jaitley introduced a law for setting up REITs and in August 2014 India approved the creation of Real Estate investment trusts. Last month, Blackstone Group LP – Sponsored, Embassy Office Parks raised Rs 4750 cr through India’s first REIT IPO. The IPO was over-subscribed 2.58 times. Investors in this REIT IPO were allotted units at a price of Rs 300. On its listing day, the REIT IPO received a thumbs up from the market when it touched a daily high of Rs 325 and closed at Rs 314, thus enabling IPO investors to earn a sizeable gain of 4.7% on the issue price. With it India became another market having REIT offerings for individual investors.
Reduced Risk, Stable Returns, and Diversification for Investors in Real Estate (REIT)
A new fund-raising avenue for the cash-strapped real estate sector in the country. Firstly it gives investors an investible corpus of only a few lacs to invest instead of conventional Real Estate where you were set back by a huge amount. Secondly, it also gives investors exposure to a pool of real estate thus giving them much-needed diversification across properties and geographies. This reduces risk as end users are holders of units of securitized real estate pools. According to the guidelines, REITs will have to invest in a minimum of two projects with 60% asset value in a single project. REIT will showcase the full valuation on a yearly basis and will also update it on a half-yearly basis. Thirdly it is managed by a professional investment team so investment risk is further reduced. Last but not least is a friendly taxation structure. if a REIT unit will be by the investor for a period of more than 3 years then the long-term capital gain will be applicable. If the periodic income is through dividends then it is tax-free and if the pay-out is in the form of interest then tax will be applicable as per the tax slab of the unit holder. For Indians, Real Estate has always been a preferred investment class as according to an RBI study about 56 percent of Indian household savings have been concentrated in Real Estate but Indians have long invested largely in Residential Real Estate which has lower rentals. Retail investors have stayed away from commercial real estate because of the higher ticket size of investment and the complexity associated with commercial property ownership. Colliers Research shows that the Indian market is rife with great opportunities in terms of rental yields as evident from the infographic shown below.
The launch of the first REIT will certainly be a game changer for Real Estate as it has the potential to revive the commercial real estate segment by introducing Retail investors to contribute sizeable inflows across this segment.
Needed Liquidity Boost for Real Estate Industry (REIT)
The greatest benefit for the Real Estate industry as a whole will be that of fast and easy liquidation of investments in the real estate market, unlike the traditional way of disposing of real estate which is very opaque and fraught with risks of fraud, cheating, and legal disputes emanating from property records. The assets under REIT corpus are rent-bearing assets where an established name has gone through due diligence from multiple bodies including SEBI, so property records will be transparent and it will boost Real Estate industry sentiment. India’s real estate has endured a lot in recent years. Despite the high credit growth environment and factors like Demonetisation, Global Recession, and rapidly evolving GST structure, Real estate has held forth as a preferred asset class for Indians. This is a much-welcomed move and will give the real estate industry a much-needed boost. Given the prevalent situation of funding crunch, the launch of the first REIT offering in India is very well-timed for real estate developers who want to unlock much-needed capital to fund further projects or to pare down their debt. It will also greatly reduce a great deal of pressure on the NPA-saddled banking industry. It will ensure more liquidity for Banks to lend to end users and customers instead of relying on a much riskier way of lending through Loan Against Property (LAP) and Lease Renting Discounting (LRD).
About the Author
Sunil Kumar Gupta is an entrepreneur par excellence, philanthropist, and a great visionary. He is the Leader of Indo European Business Forum (IEBF) and also the Founder Chairman of SARC & Associates, Chartered Accountants, and SARC Foundation, and Life Trustee of Rashtriya Antyodaya Sangh, a Public Charitable Trust. He has over 32 years of experience in diverse fields such as Corporate planning, Financing, Taxation, Banking, Education, Investments, Oil & Gas, and project implementations. He is a Fellow Member of the Institute of Chartered Accountants of India (ICAI), a Life Member of the Indian Council of Arbitration, and a Full Member of the Institute of Certified Public Accountants of Uganda (CPA-U).