REITs and Its Benefits to the Industry

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Real estate industry is the second largest employer in India next only to agriculture. It contributes 6% to GDP. In the recent budget finance minister paves way for REITs to finance construction in India. Let us look what is REIT and how it benefits the industry.

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  • REITs and Its Benefits to the Industry
  • Real Estate Eco System:- Real estate industry is the second largest employer in India next only to agriculture. It contributes 6% to GDP. In the recent budget finance minister paves way for REITs to finance construction in India. Let us look what is REIT and how it benefits the industry. What is REIT:- Real Estate Investment Trust (REIT) is an investment vehicle which allows investors invest in real estate indirectly without taking complete risk. The trust invests in apartment, villa or commercial space and generates rental income. REIT will operate through Trust and any person who invests in REIT will be allocated units (equivalent of equity shares in public traded company). By rules it distributes major part of its profit to the unit holder, which does not allow money to be used for speculative activities.
  • By the very nature of REITs, it is beneficial to both the investors and the industry in different ways. On one hand, REITs provide the investors with an investment avenue, which is comparatively less risky than investing in under-construction properties and provides regular income. On the other hand, REITs provides an alternate fund raising opportunity to the builder /PE investor who wants to liquidate their position. In India REITs will enjoy pass through status which means income tax will be payable by the investor who is receiving in his hand. No income tax liability for REITs for the net profit earned by them. Real Estate in India
  • Features of REITs: 90% of value of REITs should be invested on completed projects. 90% of net profit (net distributable income) to be distributed to unit holders. REITs can indirectly invest in properties (Special Purpose Vehicles SPVs). In that case SPV should hold 90% of the property under its control. The REIT shall not invest in vacant land or agricultural land or mortgages other than mortgage backed securities. Further, the REIT shall only invest in assets based in India. REITs can not borrow more than 50% of its Asset value. Moreover if borrowing exceeds more than 25% of asset value, credit rating from credit rating agency and approval from majority of investors is mandatory. Net Asset Value (NAV) to be declared bi-annually after doing thorough valuation including physical inspection.
  • Purchase consideration shall not be less than 90% of assessed value of purchased property, while sale consideration shall not be more than 110% of assessed value of sold out property. To ensure high corporate governance any related party transaction with value exceeding 15% of REIT assets, borrowing more than 25% of assets needs approval of investors. Related party includes promoter, person holding more than 20% of units, associates. Sponsor is who sets up REIT and holds at least 25% of units. If the sponsor sells his units to another person, he should arrange somebody to act as sponsor.
  • Benefits to retail investors: REITs provide opportunity to retail investors to take exposure in properties which they otherwise would not have been able to take. Retail investor can quickly liquidated their position as the units are publicly traded (mandatory norm as per Real Estate Investment Trusts Regulations, 2013) Rs. 1000 crore of corpus is the minimum threshold limit for REITs. This provision aimed to ensure only large assets and established players enter the market. Minimum unit size is Rs 1 lakh and minimum investment option is Rs 2 lakh to take participate in REIT. REITs are managed by professional managers which usually have diverse skill bases in property development, redevelopment, acquisitions, leasing and management, etc. REITs bring in transparency and accountability in the real estate sector.
  • Benefits to Builders / Investors: Builders / Investors gets an important source of funding to liquidate completed projects and move on build other projects Getting money from REIT will enable them in running the organization professionally by way of providing regular reports, complete bank transactions. REITs are good investment option for long term pools of capital such as pension funds and insurance companies since the regular stream of cash inflow helps them in managing regular outflow to their investors. Real Estate in India
  • Subsequent to finance minister announcement SEBI also will issue final norms for REIT to list operate in India. "You might have seen that in the current budget an announcement has been made about Real Estate Investment Trust. I am hopeful that sometime next month, SEBI will be coming out with (final) guidelines. My feeling is that these guidelines are going to help the growth of real estate industry", Sinha SEBI Chairman was mentioning. REIT has contributed significantly to growth of not only to real estate but also to the overall economic growth of various countries. India needs several billions of dollars to develop large of no of houses and commercial places. REITs will provide right platform for builders to source money to develop more projects.
  • Home buyers and Retail investors will also get lot of benefit as; They can invest in real estate in small quantum. Transparency and corporatization will ensure investment will be secure with REITs. Regular dividends will generate good yield for short term investment Listing in stock exchange gives liquidity to meet family requirements Income tax benefits gives more cash in hand to the investor. Real Estate in India
  • Real Estate in India