Tuesday, 6 January 2015

Real Estate Investment Trust – Providing the Necessary Boost To The Real Estate Market In India

After years of inactivity, the real estate sector in India is undergoing some significant changes that are all set to enhance the growth of this industry. In keeping with the development of better policies and regulations for ensuring high quality and profitable real estate development for investors, the Securities and Exchange Board of India has come up with an innovative investment procedure that will enable the general public to invest in common units of income-generating properties. The scheme is based on creating “Real Estate Investment Trusts”, which will be empowered to own and manage properties that have already been developed and are capable of generating income. 

About REITs

REIT scheme has been in the pipeline for quite a while now as SEBI had earlier planned to introduce the scheme in 2008 itself. However, it was only in August 2014 that the long–pending proposal got final approval from the SEBI board clearing the way for Indian developers and financial institutions to set up the investment trusts. Before you start exploring your options and benefits under the new scheme, let’s take a look at what the scheme actually has to offer.
Prominent Features Of REIT Schemes.

If you follow the international real estate market, you must already be aware of the existence of REIT systems in countries such as Australia, USA and Singapore. You might also be unaware of the fact that SEBI has recently established the norms that would govern the functioning of the REITs. The main highlights of the same are listed below.
  • The REITs will be registered as trusts with SEBI and will not be empowered to launch any schemes on their own.
  • All REIT schemes will be strictly closed real estate investment procedures that will be initiated with the primary purpose of providing profits for unit holders.
  • An REIT should hold at least 80% of its assets in properties, besides which it should have a minimum 50% controlling interest in share capital.
  • An REIT can have a maximum of three sponsors each of whom can hold up to 5% while the collective holdings of the sponsors cannot exceed beyond 25% for at least three years from the date of listing.
  • An REIT must necessarily invest a minimum of 80% of its assets in only properties that are complete and ready to generate revenue.
  • In order to maintain the transparency in investments, REITs will have to go through an annual valuation, and they will be required to declare their and net asset values bi-annually besides updating their value after every six months.
  • The REITs will be eligible to invest only in Indian assets and it is also proposed to keep vacant and agricultural lands beyond their reach.
  • REITs can raise funds only through an initial offering, besides which the REIT units will have to be necessarily listed on the stock exchange.
  • A REIT is required to invest in a minimum of two projects with the investments in a single project not going above 60%. 
Expected Benefits Offered By REIT
The need for REIT like schemes has been felt by Indian real estate market for countless years now. With the scheme finally seeing the light of the day, it is believed to introduce internationally accepted funding practices in the Indian property market. Mentioned below are some of the major benefits that you can expect with the launch of REITs scheme. 

  • With the setting up of REITs cash-strapped developers with gain an easier access to funds while financial institutions and individuals with high-net worth will get better avenues for investment.
  • With the provision for investment in developed properties only, it will ensure relatively safer investments as compared to investment in properties that are still being developed.
  • REITs will not only provide an easier exit route for people interested in investing for a short term but also ensure them of a regular income. 
  • The returns generated by these trusts will be either from the rental income of developed properties or through capital gains on real estate, which in turn will help in increasing the depth of the Indian property market.
  • It will help you to channelize your savings into the real estate sector in a regulated manner which in turn will ensure better returns with minimal risks.
  • In case you are a real estate developer, setting up an REIT will enable you to commercialize your property and also provide you with additional liquidity.
  • As an investor, you will be eligible to receive a share of the 90% of the REIT’s net distributable cash flows.
  • Since REITs will use the investors money to buy real estate options, you as an investor are likely to receive the benefit of property price rise without facing the hurdles of buying and maintaining any property.
  • It will ensure the maturity of the Indian real estate sector by minimizing individual speculation and enhancing professional investment and management. 
Scope And Future OF REITs In Indian Real Estate Market
 The launch of the REIT scheme has leased in new life into the choppy real estate market in India. With this asset-based investment option, real estate developers can now invest their money easily without feeling trapped in the plethora of regulatory approvals. Both developers and investors are considering the launch of this scheme to provide a major boost to the investors and revive the interest of both domestic and foreign investors. 

The government is also encouraging real estate investment through REITs as is evident through its announcement about planning friendlier tax norms for the scheme. This has led to several financial institutions and real estate firms already initiating the process of setting up REITs. With diversified investment risks through a large pool of investment in multiple properties, most major banks are also favoring the scheme as it minimizes the chances of loss through funding of several projects. In view of these facts it would not be wrong to state that REITs are all set to revive the confidence of people related to the real estate investment in a direct or indirect manner and help enhance the growth of this sector in a significant manner.

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