Real Estate Investment Trusts (REIT ) – everything you need to know

Can’t afford expensive properties but still want to invest those extra few lacks in real estate? It may soon become a reality and you shall be able to invest in real estate with only a few lacs in hand.

The Securities and Exchange Board of India (Sebi) had given its approval to Real Estate Investment Trusts (REITs) in 2014. Finance minister Arun Jaitley also cleared the last hurdles in budget 2016 – 2017.

Just like mutual funds, REITs will pool in money from investors and issue units in exchange. REITs involve pooling of funds from investors to invest solely in rent-generating real estate properties and other permissible areas. The REIT will have to first get registered and raise funds through an initial public offer or IPO. Units of REITs will have to be compulsorily listed on exchanges and will be traded like securities.

Listing commercial properties on REITs will allow builders to raise cheaper capital and also offer an opportunity for retail investors to participate in India’s growing commercial realty market. All REIT schemes, to start-off with, will be close-ended real estate investment schemes that will invest in property with the aim of providing returns to unit holders. The returns will be derived mainly from rental income or capital gains from real estate. REITs, Sebi said, will be allowed to invest in commercial real estate assets, either directly or through special purpose vehicles (SPVs).

What is REIT?

They are investment trusts that operate much like the mutual funds. Globally, REITs invest primarily in completed, revenue generating real estate assets and distribute major part of the earning among their investors. Typically, most of such investments are in completed properties which provide regular income to the investors from the rentals received from such properties.

Globally, framework for REIT exists in several countries including United States of America, Australia, Singapore, Japan, France, United Kingdom, etc. In most of these countries, REITs appear to have the following features:

a. REITs are managed by professional managers which usually have diverse skill bases in property development, redevelopment, acquisitions, leasing and management, etc.

b. In countries where REITs are available for retail investors, they provide an avenue to such investors in properties which they otherwise would not have been able to take an exposure.

c. REITs are also a popular investment option for long term pools of capital such as pension funds and insurance companies primarily since the regular stream of income helps them in managing regular outflow to their investors. d. Listed REITs provide liquidity thus providing

d. Listed REITs provide liquidity thus providing easy exit to the investors.

e. REITs bring in transparency and accountability in the real estate sector.

REIT Structure

REIT Structure
Source – KPMG public document. All rights reserved with the original author.

SEBI Regulations

In India, REIT will be set up as a Trust and will have parties such as trustee (registered with SEBI), sponsor, manager and principal valuer with specific responsibilities. After the registration the REIT would raise funds through an initial offer from investors and get listed. The minimum issue size of the initial offer has been specified at Rs 250 crore and the regulator has specified that the size of assets under the REITs should not be less than Rs 500 crore.

Refer this documents for more details: Real Estate Investment Trusts, Regulations, 2014.

How would it benefit the real estate developers? 

Globally, they invest in completed, revenue generating real estate assets and distribute major part of the earning among their investors. They are beneficial not only to the investors but also to the industry as they provide the developer or a PE fund an additional avenue to exit thereby providing them the desired liquidity. It will boost the liquidity situation of cash-starved developers, which are struggling to find funds for their construction activities.

Benefits for small investors

Investors will be able to buy units of REITs from both primary and secondary markets. While investing in an IPO, the minimum investment amount will be Rs 2 lakh, while on exchange the minimum lot size will be Rs 1 lakh.

Key benefits:

  • Reduces ticket size for investing in real estate sector.
  • Transparent investment alternative in real estate sector with experienced professionals
  • Easy entry and exit in real estate market.

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