Indian REITs that you need to consider
Property Funds in India – Awaiting a Welcome
A Real Estate Investment Trust (REIT) is much like a mutual fund that invests only in real estate. It may buy, manage, sell and develop real estates. It breaks down the ownership of properties into units that are sold to investors.
As per Draft Securities and Exchange Board of India (SEBI) (Investment Trusts) Regulations 2008, REITs should carry a minimum net worth of rupees three crore during the time of registration, increasing to rupees five crore within three years in the date of grant of registration. As per the draft legislation, REITs should distribute 90% of its income (generally leasing income) to its investors as regular dividends. By investing in REITs investors can reap the advantages of investing in real estate without going through the long as well as tedious procedure, besides REIT units can be easily liquidated in contrast to traditional properties.
REITs are typically established by sponsors that then enter management agreement with Real Estate Asset Management Companies for controlling their REIT schemes. Public is then invited to subscribe towards the units of their schemes. Units under REIT schemes must be mandatorily listed on any recognized stock market within a period of six weeks from the closure from the scheme.
Broadly, REITs are classified as equity, mortgage or crossbreed REITs. Equity REITs are the most common form of REIT especially in america, the world’s largest REIT market. While Equity REITs earn revenue as rents and leases by buying, developing or owning properties, Home loan REITs earn interest from financing property deals.
Some REITs may also be sector specific that invest only in commercial buildings (department stores, office buildings, warehouses, community centers or entertainment centers) or even residential buildings. Investors can choose schemes based on their danger appetites. Some of the key ratios to judge an REIT’s overall performance are NAV (Net Asset Value), AFFO (Adjusted Funds from Operations) and CAD (Cash Readily available for Distribution)
An advantage of investing through REIT is that they hire professionals and legal experts that ensure that the property they are investing in has a free title and it is free from any legal mess. Moreover, as REITs invest in several sectors like retail, commercial and residential properties, investors can reap the advantages of diversification which they may be unable to do within their own available resources.
In 2007, SEBI had introduced a draft legislation for REITs. Legislations governing the establishment of REITs were likely to be introduced by the end of 2009. However, the current bearish mood and lack of investor confidence in areas seems to have forced the Indian Government to push away introducing any legislation as of this moment.
Given the lack of transparency and standardization in pricing of properties, raising funds from capital markets is a major challenge for REITs that still deploy high level of debts to improve their returns. RBI too is constantly on the maintain a cautious approach while lending to real estate industries. Besides this, higher transaction costs and delays in obtaining home loan approvals are creating bottlenecks.
Following are some of the reasons to believe that REITs would have been a success in India.
- Demand for residential and commercial spaces have acquired after a lull in 2008.
- In India, Average rental yields are higher (8. 5% to 10%) compared to other nations (Japan: 3. 5%, Singapore: 5. 2%, Hong Kong: 5. 7%).
- Development yields are comparatively higher in India compared to other developed countries.
- Increasing urbanization and growing income will ensure that the demand for real estate attracts investment.
Experts suggest which awareness, expanded credit availability and increased adoption of REITs in India increases the flow of information regarding rent and valuations resulting within improved transparency in pricing of properties. By gaining access to capital markets and exit routes REITs can improve margins and may reduce their overall cost of capital.
Investor’s Profile
Both most active investor segments are High Net Worth Individuals (HNIs) and Banking institutions. While the institutions traditionally show a preference to commercial expense, the high net worth individuals show interest in investing in residential in addition to commercial properties.
Apart from these, is the third category associated with Non-Resident Indians (NRIs). There is a clear bias towards purchasing residential properties than commercial properties by the NRIs, the fact might be reasoned as emotional attachment and future security sought by the actual NRIs. As the necessary formalities and documentation for purchasing immovable properties besides agricultural and plantation properties are quite simple and the leasing income is freely repatriable outside India, NRIs have increased their role as investors in property
Foreign direct investments (FDIs) in real estate form a little portion of the total investments as there are restrictions like a minimum lock in period of three years, a minimum size of property to become developed and conditional exit. Besides the conditions, the foreign investor will suffer from a number of government departments and interpret many complex laws/bylaws.
The idea of Real Estate Investment Trust (REIT) is on the actual verge of introduction in India. But like most other book financial instruments, there are going to be problems for this new concept to become accepted.
Real Estate Investment Trust (REIT) would be structured like a company dedicated to owning and, in most cases, operating income-producing property, such as apartments, shopping centres, offices and warehouses. A REIT is really a company that buys, develops, manages and sells real estate assets and allows participants to purchase a professionally managed portfolio of properties.
Some REITs also are engaged in financing property. REITs are pass-through entities or companies that are able to distribute nearly all income cash flows to investors, without taxation, at the business level. The main purpose of REITs is to pass the earnings to the investors in as intact manner as possible. Therefore initially, the REIT’s business activities would generally be restricted in order to generation of property rental income.
The role of the investor is instrumental in scenarios in which the interest of the seller and the buyer do not complement. For example, if the seller is keen to sell the home and the identified occupier intends to lease the property, in between them, the deal will never be fructified; however, an investor might have competitive yields by buying the property and leasing it out towards the occupier.
According to a latest report of FCCI and Ernst and Young within the list of top nine attractive destinations for property investments, India is ranked since the fifth most attractive destination for future property investments. In this list China is on the top spot, USA is on second followed by England and Singapore. Because of good economy development and improved housing market index, India gain fifth spot as most attractive destination. However China remains attractive as an investment destination primarily due in order to its impressive economic growth record and favorable demographics.
If government of India allows investment trust (REIT) and real estate mutual funds (REMF), Indian can overtake the Chinese attractiveness in property investment. Lack of source of finance in India is also among the reason for making Indian property investment less attractive than additional. So that government should promote some alternative source of funding this is helpful in getting good response.
This is all about the Indian real estate position in the world and now I will explain you why Indian property can be more profitable within future.
In India the price of houses are going to increase high because India will face shortage of over 26 million houses by 2012 so in retrospect demand of houses will be more as compare to the actual supply.
“With India back on a high growth trajectory, demand for commercial and residential space will probably witness an upward trend, ” consultancy firm Ernst and Young said inside a report.
Because of growing young working population, increasing urbanization, declining household size and improved accessibility to loans demand for residential property going to rise more full of future.
In India $1. 2 trillion investment was needed to satisfy the rising demand for urban development said Co-chairman of FICCI Property Committee Pranay Vakil.
He said that the urban population in India would nearly double to 600 million within the next 15 years from nearly 350 million now, and this might put massive pressure on urban infrastructure, including roads, power as well as water supply.
Dean Hodcroft, partner-head of real estate for European countries, Middle East, India and Africa at Ernst and Young, stated India needed institutional reforms to attract more investments in national infrastructure development projects.
How to buy REIT units?
Individuals can purchase REITs by purchasing units on an open exchange. This can be achieved online through a demat account or directly through the REIT. Report on REITs is expected to commence in 2016
List of Investment Trust (REITs) in India:
Many companies have expressed interest to begin REITs in India. Notable among them are DLF, Xander, Embassy Team, Red Fort Capital etc. With chances of government allowing international investment in future, REITs could pick up in a good way in India