REIT- an easy way to invest in real estate
Real Estate Investment Trust have been hit in developed market and is present across 30 countries. Following the growing demand for commercial buildings and space need to evolve investment vehicle like Real Estate Investment Trust was observed in the country.Securities and exchange board of India (SEBI ) recently notified regulation in regards to Real Estate Investment Trust or REIT as it is commonly known . The regulation paves the way for creation of a new asset class for the Indian investor. This allows small savers to invest in real estate which was previously not possible. REIT will be modeled on the lines of mutual funds where investors will be able to buy individual units.
History of REIT
REIT’s have existed in developed markets for a long time. It was created in the United States in 1960. The stated purpose was to give investors an opportunity to invest in large scale income producing real estate. Since then it has spread to more than 30 countries. In Asia REIT’s have been successfully launched in Singapore, Hongkong , Japan and Australia among others. Singapore has been the most successful REIT market in Asia with 26 REITs listed on the Singapore stock Exchange. United States has the highest number of registered REITs around 1100 although many are not publicly listed.
How does it work?
REITs are modeled on the lines of common mutual funds. They allow individuals to become part owners by purchasing units, in the same way they become owners by purchasing stock. Investors can become part owners on large real-estate projects by purchasing unit in REITs.
REIT guidelines
In India recently published REIT guideline limit the maximum number of sponsors to 3. A REIT has to own assets worth at least Rs 500 crores before it can offer shares to public. After registration REIT would raise fund via an IPO. The same has to be listed on the stock exchanges within 12 days of the IPO. The minimum subscription amount is Rs 2 lac. At least 80% of the value of the REIT should be invested in completed rent generating properties. REITs will be allowed to invest in commercial real estates either directly or through special purpose vehicles.
Key Benefits
Regular dividend payout: REITs are required to compulsorily pay out 90% of their profits (globally 80%) making them similar to bonds. This will provide regular stable dividend income as majority of the amount will be invested in rent generating properties.
Diversification: REIT provides an opportunity for small investors to invest in real estate which they typically could not have due to high entry costs. Thus it will help in diversification of the portfolios of such investors.
Improved Transparency: Since these fund will be required to file a variety of information to the regulator like rental price, occupancy rate etc it will bring greater transparency to the real estate sector in general.
Conclusion
REIT will make it possible for the small savers to invest in the real estate segment and therefore is a step in the right direction. Not only will it be beneficial to the investor but cash strapped real estate developers will benefit from access to a different source funding as well. The popularity of REIT in India will depend a lot on its tax treatment which is currently not under the ambit of SEBI regulation. Overall it’s a new asset class available to the Indian investor that improves the scope for portfolio diversification. REITs will give small savers to invest in real estate and encourage a new segment of investors to enter the market.
