REIT stands for Real Estate Investment Trust, they are the next big step in the direction of bringing stability and liquidity to the real estate sector. Their introduction is seen as a maturing factor for the current real estate market in India. The biggest challenge faced by the real estate sector in the present times is poor liquidity, less accountability and absence of an organized framework.
Implementation of RERA and Benaami Act has already been enforced to take care of the last two points of concern. In the series of developments taking place, REIT must be seen as an outcome of one of the government policies aimed at tackling the situation of poor liquidity. We at HousingMan, have simplified this concept for you and here are a few noteworthy facts about this next big thing.
What is a REIT – Real Estate Investment Trust?
In simplified terms, the REIT is a listed entity that will be investing in income-generating real estate projects by using the capital raised from investors’ money and will be paying back to them the dividends generated from accruing sales and from the appreciation in value of the real estate assets bought. The Real Estate Investment Trust India will not be authorized to launch any scheme but will raise funds through initial offers and by listing them on exchange for trading.
In easy terms, a REIT is an investment avenue that owns and operates real estate assets and allows individual investors to invest in it and earn income through partial/equity level ownership of commercial real estate without the need of buying those assets. REIT ‘s are similar to mutual funds. It provides long-term capital appreciation, trades on major stock exchanges, provides liquidity in real assets typically offering high and stable yields on investments.
How will REIT companies work?
SEBI – Securities and Exchange Board of India, has approved the REIT platform. The REIT will need to be registered via an initial public offering (IPO). REIT units will have to be listed with exchanges and consequently, traded as securities. With REIT’s, investors can start off with a sum as low as INR 2 Lakhs, in exchange of units.
The working of REIT is going to be the same as that of a mutual fund, the only difference being the investment portfolio. While mutual funds are meant for investing in stocks, REIT funds will be targeting the income generating real estate properties such as commercial rentals, office spaces, hotels, shopping spaces and likewise.
To get identified as REIT companies, the entities will be required to fulfill the following requirements:
- The companies should have minimum size of assets evaluating to Rs 1000 crore under management.
- The 90% of REIT assets should comprise of finished projects or ready to use properties generating revenue. Remaining 10% can be allotted to other kinds of assets but falling under real estate category only.
- REIT returns to the investors would come from the minimum of 90% of the net distributable income after tax earned by the company.
The structure of REIT will be like that of a trust where a trustee will hold the assets on behalf of the investors.
Benefits of REIT’S to the Real Estate Industry
The real estate sector is not seen as a promising avenue by many investors given the uncertainty and lack of accountability it comes with. Long-term holdings and the huge size of capital required for investing in real estate leaves the power amongst the handful few (investors with large budgets) to invest in this sector. This is how introduction of REIT’s on a large scale in India will prove to be a game-changer for the sector.
- REIT investing will help in extending the opportunity to small budget investors, as well, to pitch in the money in this sector and avail profits accordingly. The real estate players are currently facing the problem of cash crunch and unsold inventories are adding more to it. With REIT’s in place, the cash inflow to the real estate sector will be improved and there will be substantial activity seen in this otherwise slow investment avenue.
- REIT’s are dictated to invest in two or more different projects at a time, with the maximum investment in any of this to be 60%. Thus, the investors will be given the opportunity to diversify their investment avenues with REIT’s clubbing two or more avenues under single scheme.
- The REIT investing will be reducing the risk of the investors. As the 80% of their investments will comprise of income generating ready commercial properties and the 20% will be made available for investing in the ongoing construction projects, mortgage securities, government securities, and other cash equivalents.
Thus, all in all, the REIT’s are being introduced to create investment opportunities in real estate, thereby making it a more reliable, more profitable and safer investment avenue. This will particularly help in making real estate for everyone, builders and customers.
Here’s how REIT funds in India are going to improve the cash influx in real estate
REIT funds allow the investors to buy the units of fund as against the actual real estate property. Thus, the retail investor is not going to put the money in one real estate in lump sum, but is given the opportunity to invest in fund equal to the value of two or more real estate properties keeping the long-term perspective in mind.
The role of REIT funds in improving the cash influx in real estate.
- It will bring real estate within the buying reach of many small investors.
- The funds will encourage long-term investments as the time required to develop and sell property takes time. Thus, the period of retaining the money in the sector will increase.
- The dividends will make the investors part of profit sharers in the projects.
- Since the process of buying and selling the fund units will be quick and easy, it will enhance the liquidity level in the sector.
For those who want to invest; here is the list of best REIT funds in India
- HDFC Property Fund
- Aditya Birla Real Estate Fund
- ICICI Pru India Opportunities Real Estate Fund
- Birla Sun Life Global Real Estate Fund
- Everstone Horizon Realty Fund
- Secura India Real Estate Fund
Risks to tackle
Like mutual fund, the investor will not have any control over the REIT’s decision of continuing or exiting the investment in any real estate property. Since the volatilities are like stock exchange, the risk of lower returns than expected cannot be denied.
The move of making REIT’s a popular investment avenue is going to be fruitful and bring in liquidity to the real estate market. It is also expected to boost the retail investor sentiment by offering investment opportunity with the hope of bigger and better returns over the long run. Thus, REIT India is seen as a promising solution for reducing the number of unused inventory in the real estate sector and to boost the liquidity level in this sector.
Real estate investments trusts will be a big boon for the Indian real estate industry. They are intended to enable people from all strata of society to invest in the Indian property market and avail safe and rewarding returns and boost funding in this sector.