Real Estate Investment Trusts – A Concept worth exploring
REAL ESTATE INVESTMENT TRUSTS
Real Estate Investment Trust (REIT) in essence is an entity (trust as it would be) that would manage a pool of funds by several investors, by investing them in different properties. A draft discussion paper on the same was released by Securities and Exchanges Board of India (SEBI) in October 2013. Then later in August 2014, SEBI approved this product: I – REIT (REITs in India).
This product structurally has similarities to mutual fund and operationally there are similarities to equities trading. As of now SEBI has cleared investment in completed properties that can generate revenue in the form of rent – 90% of the funds thus raised must go into such properties. It is thus clear that given the choppy real estate situation in the country and our lack of experience on this product, SEBI is playing it safe. The remaining 10% can be invested in mortgage backed securities, equities of companies deriving at least 75% of revenue from real estate activities and a few other specified avenues.
The funds for investment would be raised through initial public offers (IPOs). The investors would get units in exchange for their investment. The units would have to get listed on exchanges and would get traded like securities. Similar to trading in equities, investors would be able to buy and sell these securities. The minimum investment in such an IPO is Rs. 2 lacs. Once listing is done, for trading on the exchange the minimum lot size would be Rs. 1 lac. As the investment of these funds would be into revenue generating properties (rental incomes), the income generated through the year would get distributed to the investors as dividends. This instrument in effect enables someone with funds as little as Rs. 1 lac, to invest in real estate and get the benefit of both annual income and also capital appreciation.
Valuation of the underlying properties where the investment has been made and concentration / diversification of investments by I-REIT are other key elements of the product. On these, a yearly valuation of the properties is a mandate by SEBI. However, given the condition of the markets, it would be better to look at a valuation every 4 to 6 months. The investment has to be made in at least 2 projects (there seems no restriction on the including more projects for investment). However, not more than 60% of the value of total funds for investment, should go in any one single project.
I-REITs are envisaged to offer investors with another avenue for placing funds in their investments portfolio. While the markets currently are not in a great shape, but structurally, going by the past history in the country, both rental yields and capital appreciation may turn out to be reasonably good.
Besides the REITs, we also have other Real Estate Investment Funds in the country. Many financial service companies such as Birla Sun Life, Kotak, Piramal Group, HDFC etc. have raised money from high networth individuals for their real estate funds. They focus more on capital appreciation. Therefore, they invest in projects which are at an early stage of development, thereby indirectly financing the builders. Their returns come from the profits on final sale of finished properties or through a higher coupon rate agreed with the builder or a mix of both. They are structured as PE funds and have to stay invested for a certain minimum period , 6 to7 years. Investment is made in the first three years and returns are collected from the 4th or the 5th year onwards. There are no annual returns and these offer no liquidity in the intervening periods. Further, the minimum investment here is around Rs.25 lacs, which keeps small investors out of this market. Hence for smaller investors, professionally managed REITs are a good solution. Even though all the property related risks remain here as well, the risks get well distributed. As relatively lower risk and moderate return investments, REITs are a good option for investors. As always, we keep our fingers crossed to see how the concept unfolds in India.
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