REITs – Real Estate Investment Trusts

A Real Estate Investment Trust (REIT) is like a mutual fund that invests only in real estate. It can buy, manage, sell and develop real estates. It breaks down the ownership of real estate properties into units that are sold to investors.
As per Draft Securities and Exchange Board of India (SEBI) (Real Estate Investment Trusts) Regulations 2008, REITs should carry a minimum net worth of rupees three crore at the time of registration, increasing to rupees five crore within three years from the date of grant of registration. As per the draft regulation, REITs should distribute 90% of its income (generally rental income) to its investors as regular dividends. By investing in REITs investors can reap the benefits of investing in real estate without going through the long and tedious procedure, besides REIT units can be easily liquidated unlike traditional properties. glenn delve

REITs are typically established by sponsors that then enter into management agreement with Real Estate Asset Management Companies for managing their REIT schemes. Public is then invited to subscribe to the units of their schemes. Units under REIT schemes must be mandatorily listed on any recognized stock exchange within a period of six weeks from the closure of the scheme.

Broadly, REITs are classified as equity, mortgage or hybrid REITs. Equity REITs are the most common form of REIT especially in the US, the world’s largest REIT market. While Equity REITs earn revenue in the form of rents and leases by buying, developing or owning properties, Mortgage REITs earn interest from financing property deals.

Some REITs can also be sector specific that invest only in commercial buildings (malls, office buildings, warehouses, community centers or entertainment centers) or residential buildings. Investors can choose schemes based on their risk appetites. Some of the key ratios to judge an REIT’s performance are NAV (Net Asset Value), AFFO (Adjusted Funds from Operations) and CAD (Cash Available for Distribution)

An advantage of investing through REIT is that they hire professionals and legal experts that make sure that the property they are investing in has a free title and is free from any legal mess. Moreover, as REITs invest in many sectors like retail, commercial and residential properties, investors can reap the benefits of diversification which they may be unable to do within their available resources.

In 2007, SEBI had introduced a draft regulation for REITs. Legislations governing the establishment of REITs were expected to be introduced by the end of 2009. However, the current bearish mood and lack of investor confidence in real estate markets seems to have forced the Indian Government to push away introducing any legislation as of now.

Given the lack of transparency and standardization in pricing of real estate properties, raising funds from capital markets is a major challenge for REITs that continue to deploy high level of debts to improve their returns. RBI too continues to maintain a cautious approach while lending to real estate sectors. Besides this, higher transaction costs and delays in obtaining approvals are creating bottlenecks.

Following are some of the reasons to believe that REITs will be a success in India.

1. Demand for residential and commercial spaces have picked up after a lull in 2008.
2. In India, Average rental yields are much higher (8.5% to 10%) compared to other countries (Japan: 3.5%, Singapore: 5.2%, Hong Kong: 5.7%).
3. Development yields are comparatively much higher in India compared to other developed countries.
4. Increasing urbanization and growing income will make sure that the demand for real estate attracts investment.