There has been much excitement about the future of real estate investment trusts (REITs) in India on the back of two interesting developments recently.
The first was a regulatory change where SEBI allowed REITs to invest up to 20 per cent of their corpus in projects which are under construction. The second was the policy change which now allows REIT investment into educational institutions.
For the realty industry which has been cash strapped for some time now, this is great news. Several companies could use this route to unlock the value in their educational ventures and that is why policymakers should be closely watching the developments.
India is now waking up to REITs, which is an established mode of investment for institutional as well as retail investors for the real estate sector.
REITs have emerged as a tax efficient way to unlock value for real estate companies. Developers invest huge sums in acquiring land, stay invested to build the property as a commercial, healthcare or educational venture which gives a healthy annual return. With REIT funds for educational projects now a reality, realtors have one more option to unlock value for the assets that they own.
REIT is an investment vehicle that parks money in realty projects that have been completed, hence earning rent for the investors. Since it has annuity income, it is referred to as one of the policy measures that can, potentially, transform the Indian real estate sector. At a time when realty returns are negligible, REITs for educational institutions can be a boon for the industry.
SEBI’s regulation has, after careful consideration, decided to keep REITs confined to high net worth individuals. Its conditions impose enough checks and balances on the functioning of REIT to ensure there is transparency in their operation and that the interests of the investors are protected. SEBI’s regulation, debated and discussed at length as it evolved from the beginning of the decade, seem to be a little out of sync with reality.
The recent decision to remove dividend distribution tax and allowing REITs to invest 20 per cent of its investments in projects under construction are welcome. It confirms that the policymakers are in the right direction to make sure REITs can take off. A more aggressive nudge by the policymakers and regulator would help realty companies out of the tight liquidity they find themselves in.
If implemented in the right earnest, these changes have the potential to unlock value for shareholders and assets that these companies are saddled with. Since India’s market regulator does not allow retail investors to invest in REITs, it will not be possible for them to be part of the wealth creation under the REIT model.
But global experience shows that several REITs are also listed at select exchanges, which gives an opportunity to study their performance based to returns given to the markets. Five year returns between 12-24 per cent for REIT funds have been seen in different markets. Japanese and Malaysian markets have been found to have returned 7-12 per cent returns.
For the Indian markets, REITs will be governed by guidelines of the market regulator, Securities & Exchange Board of India (SEBI). It will have to comply with the need for an independent trustee, auditor and others.
Several global funds are looking for better returns and have been eyeing emerging economies to park their funds. India’s strong growth, led by domestic consumption, could be just the right opportunity for these funds. For realty companies, it would mean institutional investors buying a part or entire stake into their projects for annualised returns. That liquidity and unlocking of value could be critical for fuelling further growth for the realty companies.
Creating the win-win situation that could marry the needs of policymakers looking to drive growth further, investors seeking better returns and realty companies who could unlock value hidden in their assets could just be music for India’s growth story.
If there was a perfect opportunity for investors to put in money in India’s commercial real estate and exit after a good return, nothing could be more perfect than REITs.
