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Why REITs are significant for the Indian realty market

Saturday, May 04, 2019

By R K Arora
Chairman Supertech Ltd


You may not know it; however, Real Estate Investment Trusts (REITs) sway your life consistently. From where you live, work and play to your retirement funds, the effect of REITs is surrounding you.

A great many people don’t have the time or resources to buy and manage large-scale, income-producing real estate. But the good news is that REITs will now allow all Indians to own a share of the kind of real estate that would otherwise be financially out of reach. How? A similar way mutual funds work, enabling individuals to purchase and sell REITs on open stock trades.

Benefits of Investing in REITs:
The global capital allocation towards REITs is increasing exponentially. In major signoff, investors again taking a fancy to Indian real estate, the sector has garnered a whopping Rs 8,000 crore in the last fortnight alone. This involves Rs 3,200 crore QIP by DLF and the Blackstone-Embassy combinedly raising Rs 4,750 crore in India’s first ever REIT offering. Private equity players have invested close to $53 billion since 2008 in India’s real estate story. And India’s maiden REIT listing last week is expected to bolster investor confidence, as it provides. For investors, the chance to own a share of valuable real estate has meant income as well as diversification for their investment portfolios.

To qualify as a REIT, an entity must have the bulk of its assets and income connected to real estate investments, and it must distribute at least 90% of its taxable income as dividends to shareholders. As a result of these necessities, REITs give a one of a kind mix of all-out return that sits among stocks and bonds. By comparison, equity returns have mainly been due to capital admiration, and fixed income returns have been more dependent on income, or coupons. The extraordinary blend of development and required investor payouts that REITs give might be appealing to add up to return financial specialists with a pay center. Alongside their extraordinary, income-oriented attributes, REITs may likewise help diversify a portfolio and lower overall portfolio risk.

In addition to strong historical performance, it is believed that there will continue to be opportunities for real estate investors going forward. The current REIT cycle has been bit lengthy, but long and persistent economic cycles are common in real estate. Given nature, rising loan fees are additionally worth considering. In these periods, REITs have really been extensively increasingly adaptable, completely beating fixed pay after some time.

Success of first REIT’s and its impact on Indian Real Estate Market:
REITs in India are also expected to provide the common man an opportunity to invest in fixed income securities which also provide long-term capital appreciation. Due to limited investment opportunities, savings made by such investors are usually channelised into gold and housing which are unproductive assets. REITs as an investment class are expected to convert such capital into a productive asset class. It additionally opens to little financial specialists a field (for example lease creating land resources) which was up to this point the syndication of extensive financial specialists. Since REITs have to pay out 90% of the income back to share holders were hopeful that equals higher dividends in compare to a stock market. It will help developers in improving their debt-equity balance and assist in the growth of a more stable and mature market. REITs, being pure equity capital, will also provide developers with institutional capital to sell their assets and utilise funds for further development or for paring of bank debt. With access to public markets for IPOs not being a short to medium term option for developers in India, this option is all the more attractive.

The real estate sector is strongly associated to infrastructure and is fundamental to its growth. And given the capital-intensive nature of this sector and the limited options available to real estate developers and owners for raising funds, real estate investment trusts (REITs) offer a way forward. In general terms, a REIT is an investment vehicle that owns and operates real estate-related assets, and allows individual investors to earn income produced through ownership of commercial real estate without actually having to buy any assets. Typically, the income-producing real estate assets possessed by a REIT incorporate office buildings, shopping malls, apartments, warehouses and mortgaged property. REITs were first introduced in the US in the early 1960s and have since then been adopted as a preferred investment mode across the world.

Over the years, they have constructively changed the way in which the real estate market operates, benefitting investors as well as real estate developers. It is going to play an important role for both investors and communities across India.

Thus, it is evident that the success of REITs in any country depends on that country’s capability to customise the rules and regulations governing REITs in such a way that they fit into their own markets. The support of governing authorities to ensure a less restrictive REIT regime and favourable tax transparency status is a critical factor in the development of a vibrant REIT sector in a new market. To conclude, India has the entire gradient to witness a successful REIT regime in the long-term. All that is required is an efficient regulatory system framed in such a way that it ensures the best interest of the investor, the market and the economy, while also making the instrument attractive in terms of greater yield and less risk to entice domestic and foreign investors.

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